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Geography 3422A/B Study Guide - Gary Becker, Irrational Exuberance, Rationality


Department
Geography
Course Code
GEOG 3422A/B
Professor
Milford Green

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Rationality Video 9/16/2012 7:50:00 PM
Rationality
When it comes to money, people can make irrational decisions
Gary Becker principle of economics and rationality
Adam Smith people working in their self interest could coordinate
in markets and create positive outcomes
o Individuals behaving rationally creates an invisible hand
o People generally try to benefit themselves
Consumer behaviour model we never buy anything until we have
weighted the cost to our benefit
o People behave “as if” they are constantly calculating benefits
o Idea is to keep regulation and government interference to a
minimum
Global economy comes to a halt in 2008
o Had the power to cause great consequences
o Economics didn’t see it coming, couldn’t predict it
Are people rational about money? Or do emotions come into play?
o Rational model person should never pay over $20 for a $20
bill
o Emotional model the emotional desire to win that pulls the
bid over what the item is actual worth
Desires for quick rewards today, trumps rational
decisions
Emotions can influence peoples opinions of prices
Irrational exuberance a view that prices are higher than the ought
to be
o Housing markets in 2005 low down payments, with great
mortgage deals and housing prices on the rise thought to
reflect strong economics fundamentals
o Consumers ended up taking out mortgages they could not
afford
Money activates and excites our brains
o Speculated bubble when prices of goods continue rising,
more and more people enter the bubbles out of pure greed
and excitement
Europe (Holland) with tulip bulbs First example of a
financial bubble, people thought that since the price
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