1. Behavioral economics Chapter 30
Niklas Jakobsson
Click to add notes

2. Introduction
“Traditionally, much of economic research has relied on the assumption of a ‘homo economicus’ motivated by self interest and capable of rational decision making. Economics has also been considered a nonexperimental science, relying on observation of real world economies rather than controlled laboratory experiments. Nowadays, however, a growing body of research is devoted to modifying and testing basic economic assumptions; moreover, economic research relies increasingly on data collected in the lab rather than in the field.”
- From the press release for the Bank of Sweden Price in Economic Sciences in Memory of Alfred Nobel, 2002.
2009

3. Main findings in experimental economics
Experiments involving market institutions usually find consistency with rational and self interested behavior. E.g. market experiments yields prices predicted by supply and demand.
Experiments involving cooperation and bargaining problems usually find divergence from predictions based on a rational and self interested individual.
2009

4. Potential reasons for non selfish behavior
Warm-glow: utility from the pure act of giving
Altruism: give something to someone without strategic motives
Relative concerns: people compare to a mental reference
Intentions: not only outcomes are important (kindness)
Social capital: norms and networks that enable collective action (simplifying collective actions and reduce transaction costs)
2009

5. Overview Framing Uncertainty Time
Strategic interaction and social norms
Experiments
Summary
2009

6. Framing People are affected by how choices are presented
Positive framing compared to negative framing: the disease dilemma
Anchoring: choices affected by spurious information; lock in (Swedish church)
Bracketing: choices in different circumstances, people do not know what they would like in another setting
Too much choice; costs of choosing, people not happier with many choice possibilities (retirement portfolio)
Constructed preferences; not preexisting
2009

7. Uncertainty People systematically misjudge randomness
Law of small numbers: people are much influenced by small samples, especially if they experience them themselves. Underestimate randomness.
Asset integration: individuals care about total amount of wealth that they end up with (expected utility). Not true.
Excess risk aversion: over insure against small events
People are loss averse more than risk averse: high weight for status quo
Sunk cost fallacy: not so much for professionals
2009

8. Time Discounting: valuing benefits now and in the future
Exponential discounting: people discount the future at a constant fraction. Time consistent.
Hyperbolic discounting: today’s plan about future consumption will change in time. Time inconsistent.
Derivation of the MRS
An individual with hyperbolic discounting discounts the long term future more heavily than the short term future.
2009

9. Time
Self control
One way to deal with self control is to commit yourself to future actions; make it costly to deviate
You like to know about a subject but do not study without an exam
Overconfidence: men more than woman. Can have results on career etc.
2009

10. Strategic interaction and social norms
Behavioral game theory examine how actual people interact
The ultimatum game with a proposer and a responder
Proposer gives then responder accept or deny
Responders reject what is unfair; less than 30 percent is rejected in 50 percent of the cases
Men receive more, some cultural differences
This reflect a concern for fairness
People will enforce fairness norms even when it is not in their financial interest to do so
2009

11. Two person experiments
Dictator game
A selfish player would send nothing
Sender gives on average 20 percent (anonymously)
Social distance and “deserving” increase donations
Higher stake and earned money decrease donations
Ultimatum game
Higher stakes give more equal split, and small decrease in rejection rate as stake increase
Offers similar between genders but females reject less often
Higher offers in USA and Slovenia, lower rejection in Japan and Israel
2009

12. Two person experiments
Trust game
A selfish player would send nothing
Send about half of the money, and get about as much back
Power to take game
Responder destroy zero and authority take largest possible share
More destruction with effort
2009

13. Summary Behavioral economics study how people actually behave
People are often not very rational
People are usually interested in fairness
Experiments are important in this field
2009

14. One minute paper What is the most important thing you learned today?
What is the muddiest point still remaining at the conclusion of today’s class?
2009