ECO100Y5 Lecture Notes - Lecture 7: Hyperbolic Discounting, Exponential Discounting, Sunk Costs
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Document Summary
Behavioural economics: a closer look at decision making. Sunk costs costs that already have been acquired an cannot be recovered. They"re irrelevant for decision making as they can"t be changed. Rational behaviour- decisions that are based on making choices that result in maximising utility. Irrational behaviour- choices that don"t maximise utility but can cause a loss of economic welfare. Hyper-rational- it is based on this idea that people rationally pursue goals for increasing their personal interests. Behavioural economics- branch of economics that deals with the concept of psychology to make realistic models of individual decision making. The assumption of rational utility maximization is not always: introduce bounds on rationality to explain some behaviour. Extending the model of rational utility maximization can explain irrational behaviour: example: time-inconsistent behaviour. Time inconsistency- when we change our preferences about what we want just because of the timing of the decisions.
