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Lecture 3

ECN 340 Lecture Notes - Lecture 3: Rationality, Occupational Hazard, Daniel Kahneman


Department
Economics
Course Code
ECN 340
Professor
Thomas Barbiero
Lecture
3

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ECN 340
Week Three
Chapter One: The Logic of Life
The Economics of Sex
-Parents, brace yourselvesWith these words Oprah Winfrey introduced American to the
shocking news of the teenage oral sex craze
-Due to the cost
-Study found that between 1994 and 2004, people between 12-24 years old became more
than twice as likely to report that they recently had oral sex
-Economists claim that rational people respond to trade offs and incentives
-When the costs or benefits of a course of action change, people change their
behaviour as they max satisfaction
-Rational people think- not always consciously- about the future as well as the present
as they try to anticipate likely consequences of their actions
-With this definition, the kids must be responding to incentives: the potential cost of oral sex
must be lower than regular sex, thus they substitute as they would switch to Pepsi if the price
of Coca Cola rises
The Importance of the Rationality Postulate
-The assumption that people are rational leads us to some clear theories about the way
the world works. It can help us to strip layers of complexity and guide us toward possible
solutions
-Eg. If crimes rates are high in some areas, then rational choice theory says that crime
must pay in those areas: We need to look for a way of raising the cost of lowering the
benefit of committing crime
-We do make complex calculations of costs and benefits when we act rationally, but we
often do it
-Behaviouraleconomists have provided plenty of proof of so called irrationality
Kahneman won the Noble Prize in economics in 2002 for his work on
behavioural
economics
-The proof usually comes when experiments show that their subjects have made
inconsistent choices
-You will not get the same results when you put people in an experiment as
apposed to watching them in real life
-But we cannot extrapolate from a lab experiment
-Experiments put ordinary people in extraordinary situations therefore they are not valid
is some cases (according to John List)
-
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