ECO331H1 Lecture Notes - Lecture 7: Homo Economicus, Loss Aversion, Mental Accounting
Document Summary
Lecture 7: mental accounting and myopic loss aversion. March 5, 2019: human beings have hard time avoiding sunk costs. Can be explained by mental accounting: homo economicus assumes broadest framing. If considering spending on a sweater, would consider opportunity cost of spending. If asked to study for eco331 for one more hour: on anything else, not just on clothes: homo economicus considers giving up one hour over entire life, narrow accounting considers giving up one hour of studying for another class. Utility over final states vs change from reference point: prospect theory is reference dependent, value of item depends on how it is framed relative to reference point. Violates homo economicus: willingness to buy ticket should be same for both groups: both lost same amount of wealth, have same amount of wealth remaining, perhaps explained by mental accounting.
