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BEHAVIORAL ECONOMICS 1 Outline Introduction and overview Bounded rationality Prospect theory Intertemporal choice Motivation: altruism, reciprocity, etc Conclusion 2 Outline Introduction and overview Bounded rationality Prospect theory Intertemporal choice Motivation: altruism, reciprocity, etc Conclusion 3 Consumer theory (recap) A1. Completeness: A B or B A or A B A2. Transitivity: A B and B C A C Theorem: consumer choices can be represented as maximization of a “unique” utility function Theorem: observing sufficiently many agent choices allows for estimation of agent’s utility function Model of economic rationality, homo economicus 4
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But: examples of “irrational” behavior When buying cold weather clothing buyers are influenced by current temperature. Cell-phone users purchase sub-optimal plans by incorrectly forecasting too-high consumption levels (e.g., buy flat-rate plans when they would be better off with pay-per-use). Financial instruments (mortgages, for example) typically include many dimensions that even moderately literate consumers have a hard time evaluating. Many more... 5 Brief history of thought Classical economics (Adam Smith et al) closely related to multiple perspectives on consumer behavior Theory of Moral Sentiments : behavior determined by struggle between “passions” and “impartial spectator” Neo-classical economics (20th century) grows away from psychology: mathematical (axiomatic) modeling of agent behavior Psychology less theory driven, mostly experimental 6 Putting psychology back into economics All economics rests on some sort of implicit psychology. The only question is whether the implicit psychology is good or bad. We think it is simply unwise, and inefficient, to do economics without paying some attention to good psychology.
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  • Fall '15
  • ANDREWPAIZIS
  • Utility, Neoclassical economics, Bounded rationality

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