Study Notes for Midterm 2

Study Notes for Midterm 2 - Study Notes for Midterm 1 Econ...

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Unformatted text preview: Study Notes for Midterm 1 Econ 330 – Economic Behavior and Psychology Spring 2010 Outline of things to study: 1. Time Inconsistency a. What does it mean in intuitive terms to be time inconsistent? b. Know that exponential discounting does not yield any time inconsistency. c. The hyperbolic discounting model i. How the simple addition of β causes time inconsistency in preferences . 1. The fact that it is really time inconsistency, and not just increased impatience that matters and distinguishes hyperbolic discounting from exponential disc ounting ii. Sophisticates vs Naifs iii. How to apply the model to simple examples like doing the homework, taking a hit, or choosing which movie to see. 1. It is important here to understand the distinction between instantaneous utility (the benefit or cost you get during a period) and the discounted utility that a particular self evaluates. (This is the difference between little u and big U in our examples and the problem set). 2. Note: it is better to be able to work out the implications of the model in these simple examples than to try to learn general rules about whether sophisticates or naifs are better off in situations of present costs or present benefits. iv. The demand for commitment by sophisticates (and why the naifs don’t demand it). 1. Note that sophisticates are often willing to pay something for commitment – they may engage in costly commitment 2. I care more than you understand this basic idea and how to recognize it if I describe something like the savings commitments, rather than having you try to remember the details of the studies we discussed in class. 2. Projection Bias (intrapersonal empathy gap) a. Know what it is and understand some simple examples. b. Be able to explain the patterns of findings you would expect for projection bias, such as the results from the Read and Van Leeuwen paper we discussed in class. ...
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