ECON 310 Study Guide - Winter 2019, Comprehensive Final Exam Notes - Psychology, Utility, Thaler

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1 Apr 2019
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CLASS ONE
What is Behavioral Economics?
Briefly: a belief that economists should aspire to making assumptions about humans that are as realistic
as possible.
Similar to other economics courses in:
thinking of individuals as goal-driven (although not the assumption of utility maximization)
precise hypotheses
econometric testing
focus on markets and incentives
focus on market and incentives
Different:
careful consideration of individual decision-making
integration of other discipline’s research
The Psychology of Neoclassical economics
Not always wrong, rather incomplete:
typical assumptions of Neoclassical economics:
o correct beliefs based on correct statistical reasoning
o selfish and coherent preferences
o utility maximization
Neoclassical economics wasn’t much interested in changing these assumptions
o this led to a debate that created behavioral economics
This course explores a set of psychologically motivated and economically important new
assumptions
Do we need these new assumptions?
many economists thought/think that the classical assumptions are good enough
o ex: when harsh competition, people will very likely think only about themselves.
indeed, the classical assumptions are pretty good psychology (often, you can make very good
precisions with them)… but they can be improved.
A metaphor on the assumption of utility maximization
suppose we are trying to predict a person’s basketball shooting and play
utility maximization would say that she will make most of her shots
is this a good prediction? depends…
if we are predicting her performance after years practice, she classical model will do well
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o i.e. in a very stable environment with many repetitions and clear feedback, often people
are eventually quite close to utility maximization
but the classical model won’t work well when
A) the person only tried a few times in her life
B) when the game changes constantly
C) when she can’t observe her performance
D) when she has limited experience and plays against a professional
What situation is more similar to the economic environment? often the latter one..
- lots of decisions are taken just a few times (housing, marriage, etc.)
- economic environment is changing a lot (inflation rate, stock market crash, housing boom)
- feedback about individual decision is often poor (INDR might be cool, but what if I had chosen
psychology? no information: what job market is better)
- we interact with companies who know a lot about us.
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