Please enable JavaScript.
Coggle requires JavaScript to display documents.
Week 11: Behavioural Economics and Risk Taking - Coggle Diagram
Week 11: Behavioural Economics and Risk Taking
Behavioral Economics
Behavioral economics studies the psychological influences in economic decision making
Bounded Rationality
Concept of limited reasoning
Incomplete infiormation
Not enough time
Limitations of the brain
How do economists explain irrational behavior?
Misrepresentation of probabilities
Probabilities are often perceives incorrectly
eg. playing the lottery, monty hall problem
Seeing patterns where non exist
Gamblers fallacy (outcomes that have not occurred recently are more likely to occur soon)
Hot hand fallacy (Belief that random sequences exhibit a positive correlation)
Inconsistencies in decision making
Decisions should be consistent and transitive
Mistakes are made because of
Framing and priming
framing eg. opt in vs opt out
priming = order of questions influences answers of choices
Status quo bias
Exists when decision makers want to mantain their current choices
Intertemporal decision making
Intertemporal = Across time
Requires valuing present and future consistently
eg. studying now or panic studying later
Judgements about fairness
How does our views of fairness affect decisions?
A irrational individual acts in their own self interest
Ultimatum game
A sequential gme in which two players decide how to divide a sum of money
Illustrates that people reject a proposal to help themselves in the name of fairness
Role of risk in decision making
Preference reversal
Occurs when people risk tolerance is not consistent
Risk averse
Prefers certain payoff to a gamble with a higher expected value
Risk neutral
Choses the higher expected value regardless of the risk
Risk loving
Prefers gambling with lower expected values, but potentially higher winnings over certainty
Expected value = probability x payoff
The Allais Paradox
Chose gamble
Option B
A lottery ticket that pays 5 million 10% of time, 1 million 89% of time and 0 1% of time
Option A
No gamble - receive 1 million
Chose gamble
Option C
A lottery ticket that gives you 5 million 10% of the time
Option D
A lottery ticket that gives you 1 million 11% of the time