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Behavioral Econ Lecture.docx

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Economics 1010a1
Jeff Miron

Endowment In the standard model: WTP should be independent of whether you already have it Ultimatum Game Game where two players divide money; Player A offers player B money, and B must decide to accept or not • logically if A offers B ANYTHING, he should accept, but B usually does not unless the offer is relatively equitable Equation to solve for when/how much work to do on a given day Solve for U(xt, xt+1, xt+2)= -Xt^2 = 1/2Xt+1^2 - 1/4Xt+2^2 (this is called exponential discounting) Given constraint xt + xt+1 + xt+2 = 12 Express original equation in terms of two variables Sub into original Partially differentiate with respect to the remaining variables Solving…. Mon= 12/7 ; Tues 24/7 ; Wed 48/7 Works 12/7 on Monday 12:00 AM Tues U = xT^2 - 1/2W^2 Xt+xW= 12-12/7 Nothing has changed, so your plans will be time consistent (ie. what you thought you were going to do in the future is exactly what you are going to do when you get to the future) U(Xm,Xt,Xw)= -Xm^2 - 1/2Xt^2 - 1/3Xw^2 (this co-efficient is changed; so optimal decision is different) s.t. Xm + Xt + Xw = 12 Solving… Xm=2 Xt= 4 Xw=6 BUT now consider… Max -Xt^2 - 1/2Xw^2 s.t. Xt + Xw=10 Solving… Xt= 3 1/3 ; Xw= 6 1/3 Here, behaviour is time inconsistent How you discount the behaviour determines whether you’ll be time consistent or not Examples of behaviour changing without new news • Procrastination • Dieting • Exercise These examples show that you can objectively model behavioural economics • 1) Rational or not? • o If consumers care about fairness, perceptions, others/altruism o could say people just face high cost of figuring things out • 2) Magnitudes or Frequency • o nobody argues that everybody does that al the time • 3) How much it matters depends on whether you’re doing positive or normative economics • o f
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