Lecture_28_Behavioral_Economics

Lecture_28_Behavioral_Economics - Lecture 28: Behavioral...

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Lecture 28: Behavioral Economics c 2008 Je/rey A. Miron Outline 1. Introduction 2. Framing E/ects in Consumer Choice 3. Uncertainty 4. Strategic Interaction and Social Norms 5. Time 1 Introduction The models we have examined in this course have many virtues. They are, generally speaking, simple and elegant; they make predictions that seem approximately con- sistent with reality; and they provide a clean conceptual framework for discussing policy. Every economist, and many non-economists, agree that the standard models are a useful starting point, and perhaps a su¢ cient ending point, for analyzing a broad range of economic phenomena. At the same time, standard economics does not necessarily explain everything. In particular, some phenomena are not trivially reconciled with, or explained within, the standard paradigm. In at least some settings, non-trivial numbers of people seem to behave in ways that di/er from the predictions of standard economics, suggesting something of importance might be missing. These deviations mostly occur in the area of consumer behavior. So, over the past several decades, behavioral economics has emerged as a new way to study how consumers actually make choices. Behavioral Economics uses insights from psychology to develop predictions about choices people make, many of which 1
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This lecture provides an introduction to some of the phenomena that have been theories with those presented earlier. This lecture is not intended as an endorsement or critique of behavioral economics. I leave you to draw your own conclusions. 2 Framing E/ects in Consumer Choice In the basic model of consumer behavior, choices were described in the abstract: red pencils or blue pencils, burgers or fries, consumption or leisure, and so on. The context was never really discussed. In real life, people sometimes seem to be a/ected by how choices are presented, or framed . For example, a faded pair of jeans in a thrift shop might be perceived di/erently than the same jeans sold in an exclusive store. The decision to buy a stock may feel di/erent from the decision to sell a stock, even if both transactions lead to the same overall portfolio. A store might sell dozens of copies of a book priced at $29.95, whereas the same book priced at $29.00 would have substantially fewer sales. These are examples of framing e/ects. They are are thought by some to be a powerful force in choice behavior. Indeed, much of marketing attempts to understand and utilize such ±biases²in consumer choices. 2.1 The Disease Dilemma Framing e/ects seem to be particularly common in choices involving uncertainty. For example, consider the following decision problem.
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This note was uploaded on 09/16/2009 for the course ECONOMICS 1010A taught by Professor Jeffreya.miron during the Fall '09 term at Harvard.

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Lecture_28_Behavioral_Economics - Lecture 28: Behavioral...

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