Please enable JavaScript.

Coggle requires JavaScript to display documents.

Behavioral Economics - Coggle Diagram

- - - - Time preference is the insight that people prefer ‘present goods’ (goods available for use at present) to ‘future goods’ (present expectations of goods becoming available at some date in the future), and that the social rate of time preference, the result of the interactions of individual time preference schedules, will determine and be equal to the pure rate of interest in a society
    - - People with a high time preference favor immediate gratification, even at the cost of larger benefits in the future. Conversely, those with a low time preference are more willing to delay gratification to achieve greater rewards later.
    - - Example: You have two choices: Eat one cookie today. Wait one week and get two cookies. If you choose to eat the cookie today, you have a high time preference (you prioritize immediate gratification). If you wait one week to get two cookies, you have a low time preference (you’re willing to delay gratification for a better reward).
- - - - You're more likely to drive across town to save $10 on a $20 item than on a $1000 item, even though the savings and effort are the same.
        Similarly, a product labeled "90% fat-free" seems more appealing than one labeled "10% fat," despite being identical.
  - - - Goal: Empirical observations and real-world behaviour
      - Assumptions: Accounts for biases, heuristics and irrationality
      - Focus: on how people actually behave
      - Prospect theory, Hyperbolic discounting
    - - Goal: Provide a standard for rational decision- making
      - Assumptions: assumes rationality, consistency and full information
      - Focus: on how peple should behave
      - Expected and Utility Theory
    - - Prices rise when the government increases the quantity of money.
        A 10% increase in investment spending leads to a 2% rise in GDP.
    - - A tax cut is needed to stimulate the economy.
        The government should print less money.
- - - - These relate to the propabilities with which people think various outcomes will occur, conditional on available information
    - - This involve all four components of the standard model, referring to the ways in which people:
        
        appropriately modify their beliefs in the light of new information
        
        discount values of future outcomes
        
        determine preferences based on attitudes and values
        
        succeed in choosing optiomal actions given their preferences and beliefs
    - - These are the rankings people have over a set of opinions or gambles that are based on atttitudes and values related to the outcomes of these options
  - - - A person can compare any two consumer bundles, X and Y. Such a comparison must lead to one of three possible mutually exclusive outcomes:
        
        Basket Y is prefered to basket X
        
        (y1,y2) > (x1,x2)
        
        The consumer is indifferent between the two baskets
        
        (x1,x2) ~ (y1,y2)
        
        Basket X is prefered to basket Y
        
        (x1,x2) > (y1,y2)
    - - If three different baskets, X, Y and Z, are considered, a consumer who prefers basket X to basket Y, and who prefers basket Y to basket Z, must also prefer basket X to basket Z. This can expressed as:
        
        if (x1,x2) > (y1,y2) and (y1,y2) > (z1,z2) then (x1,x2) > (z1,z2)
      - Similarly, if a consumer is indifferent between basket X and basket Y, and who is also indifferent between basket Y and basket Z, must also be indifferent between basket X and basket Z
    - - Any bundle is at least as good as itself: (x1, x2) ≥ (x1, x2). This axiom is generally regarded as being trivial
    - - This axiom can come in either weak or strong forms: If (x1, x2) is revealed directly/indirectly preferred to (y1, y2), and the two bundles are not the same, then it cannot happen that (y1, y2) is revealed directly/indirectly preferred to (x1, x2)
  - - - Preference
        
        You might prefer chocolate cake because you enjoy rich, sweet foods more than fruit. This is your underlying preference—a reflection of your tastes and desires
      - Choice
        
        However, when it comes time to make the decision, you might choose the fruit bowl instead of the cake because you're trying to eat healthier or you're concerned about your calorie intake. Despite your preference for cake, you end up choosing fruit based on other factors, such as health concerns or social pressure (e.g., if you're dining with friends who are also trying to eat healthily)
- - - - The relevant decision-making identities, whose ultilities are interdependent
      - May be individuals, firms, teams, social organizations, political parties or government
    - - defined in different ways in certain cases
        
        A complete plan of action for playing a game
        
        Every possible contingency must be allowed for, often referred to as the term ‘rule’ for a complete plan of action.
        
        The choice of a single action (a specific action or move)
        
        Often involve either ‘cooperating’ or ‘defecting’.
        
        Defection: when one player chooses an action that increases their own payoff at the expense of the other player(s).
        
        Cooperation: taking a risky action, where one player chooses to benefit both themselves and others by trusting the opponent(s) to reciprocate.
    - - changes in welfare or utility at the end of the game, and are determined by the choice of strategy by EACH player.
        
        Notice that the word each is important; what distinguishes game theory from decision theory is that in the latter outcomes only depend on the decisions of a single decision-maker. In game theory, we look at the outcome that results from the strate-
        gic interdependency of the players’ decision-making
- - - - Our tendency to use information that comes to mind quickly and when making decisions about the future.
  - - - Gender stereotypes: We will often rely on gender as a stronger indicator of a person’s profession than other factors. For example, 25% of doctors may be women. But when we see a female in a hospital, we might assume she’s the nurse 95% of the time. We have overinflated the probability based on stereotypes.
      - Gambler’s Fallacy: The gambler’s fallacy is a type of base rate fallacy. It occurs when a coin lands on heads 5 times in a row, so we overinflate the probability that it will be heads the 6th time we toss the coin. In reality, it only had a 50% chance of landing on heads.