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CHAPTER NINETEEN- BEHAVIORAL ECONOMICS - Coggle Diagram
CHAPTER NINETEEN- BEHAVIORAL ECONOMICS
behavioral economics
economic agents are assumed to be perfectly rational
agents are assumed to perfectly understand risk and uncertainty
agents are assumed to be self-interested
identify systematic biases
models used to devolop testable hypotheses & predict economic behavior
mix of psychology, sociology, philosophy- enrich understanding of how humans make choices
Branch of economics that incorporates insights from human psychology into models of economic behavior
motivation & objectives
people sometimes make decisions that are difficult to explain
economic theory can lead to seemingly unreasonable conclusions about consumer welfare
to modify, supplement and enrich economic theory by adding insights from psychology
understanding how decisions are made- better chance of influencing peoples behaviour
key ideas
1. framing
allowing the way a decision is presented affect the choice selected
manipulating how alternatives are framed to alter choices
2. letting sunk costs matter
allowing sunk costs to affect a decision
rational decision makers only consider opportunity costs
3. faulty discounting
too impatient with decisions that involve benefits received in the future
impatient in the short run
desire for instant gratification
4. overconfidence
believing you will know what will happen in the future without it being justified by available information
believe skill level and judgement are better than they are
firms take advantage of over-confident people
monthly memberships instead of per visit fees
5. status quo bias
make decisions by accepting the default
6. desire for fairness
a tendency to punish people who treat you unfairly
7. endowment effect
difference between willingness to pay and willingness to accept
anchoring
using ridiculous anchors when you dont know anything
9. expections and aspirations matter