ECON 1 Lecture Notes - Lecture 12: Marginal Utility, Mental Accounting, Loss Aversion

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Neoclassical economics focuses much of its attention on consumer choice situations in which people only have to deal with good as opposed to bad. Three manners we deal with good and bad or prospect theory: People judge good things and bad in relative terms as gains and losses relative to their status quo. People experience both diminishing marginal utility for gains as well as for losses. People experience loss aversion- for losses and gains near the status quo, losses are felt much more intensely than gains. The prospect theory takes into account the fact people"s preferences can change drastically depending on whether contextual information causes them to define a situation as a gain or loss. Anchoring consumer can make a decision upon irrelevant information to anchor valuations. Mental accounting- people arbitrarily put certain options into totally separate mental accounts that they dealt with without any thought to options outside of those accounts.

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