Behavioral_Econ - Decision Making Decision Making about...

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Unformatted text preview: Decision Making Decision Making about Money: Behavioral Economics Traditional Economics People are rational People are selfish Behavioral Economics Not always rational Not always selfish You are interested in purchasing an alarm clock. Your local store is selling one for $ 18. The store downtown, 20 minutes away, is selling the exact same clock for $ 10. From which store would you buy the alarm clock? The local store The downtown store (67 % ) Northwestern Mutual survey of 2,731 household financial decision makers (all bachelors degree or higher) earning at least 75,000. away, is selling the exact same clock for 10. From which The local store The downtown store (67 % ) You are interested in purchasing a new television. Your local store is selling one for $ 250. The store downtown, 20 minutes away, is selling the exact same television for $ 242. From which store would you buy the television? The local store The downtown store (27%) Northwestern Mutual survey of 2,731 household financial decision makers (all bachelors degree or higher) earning at least 75,000. A B C Price $400 $300 $450 Storage 30GB 15GB 25GB A B C Price $400 $300 $450 Storage 30GB 15GB 25GB Simonson (1989) The asymmetric dominance effect A B D Price $400 $300 $350 Storage 30GB 15GB 10GB Simonson (1989) The asymmetric dominance effect I. Loss Aversion Recall in-class betting demonstration An analysis of the trading records of 10,000 accounts at a discount brokerage firm revealed: 1. Investors were more likely to sell the stocks they owned that had risen in price than those they owned that had fallen in price. 2. The stocks that investors sold outperformed those they held on to by 3.4 % over the ensuing 12 months. Data from Odean (1997) Prospect Theory Value Function Kahneman & Tversky (1979) Standard Utility Function Prospect Theory Value Function Kahneman & Tversky (1979) In addition to whatever else you own, you have been given $1,000. Would you prefer: a. 50% chance of winning $1,000 b. winning $500 for sure 16% In addition to whatever else you own, you have been given $2,000. Would you prefer: c. 50% chance of losing $1,000 d. losing $500 for sure 69% Prospect Theory Value Function Kahneman & Tversky (1979) $500 $1,000-1,000 -500 Imagine that the country is preparing for the outbreak of an unusual disease, which is expected to kill 600 people. Two programs to combat the disease have been proposed. If Program A is adopted, 200 people will be saved. If Program B is adopted, there is a 1/3 chance that 600 people will be saved, and a 2/3 chance that no one will be saved....
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Behavioral_Econ - Decision Making Decision Making about...

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