KR2_Framing_1

KR2_Framing_1 - Intro RD Risk Attitudes RD Risk Attitudes...

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Intro RD Risk Attitudes Framing & Choice-Bracketing RD Risk Attitudes (cont.) Framing and Choice-Bracketing January 18, 2011
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Intro RD Risk Attitudes Framing & Choice-Bracketing Today Quick look at KR: RD Risk-Attitudes Framing Choice-Bracketing/Narrow Framing Mental Accounting (time permitting)
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Intro RD Risk Attitudes Framing & Choice-Bracketing Motivation We’ve already seen how framing can affect decisions: Imagine that the US is preparing for the outbreak of an unusual Asian disease which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows: C: 400 people will die D: (1 / 3 , 0 die ; 2 / 3 , 600 die ) The way we construct decisions in our minds has a large effect on our behavior
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Intro RD Risk Attitudes Framing & Choice-Bracketing Bracketing We cannot look at all of our possible choices at all possible moments in time We break down life-strategy into bite-size decisions This can lead to behavior that is sub-optimal w.r.t. our lifetime-utility function. Mental accounting is a technique we use to manage this problem
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Intro RD Risk Attitudes Framing & Choice-Bracketing Reference-Dependent Risk Attitudes Restrict KR model to one dimension: money Riskless utility u ( c | r ) m ( c ) + n ( c | r ) Gain/loss utility related to consumption: n ( c | r ) μ ( m ( c ) - m ( r )) , where μ is a KT value function (A0-A4) Stochastic outcome F evaluated according to expected utility; utility of outcome is average of how it feels relative to each possible realization of stochastic reference point G : U ( F | G ) = Z Z u ( c | r ) dG ( r ) dF ( c ) Apply PE
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Intro RD Risk Attitudes Framing & Choice-Bracketing Different risk settings ‘Surprise’ vs. ‘anticipated’ risk Can commit to choice (e.g. insurance) in advance vs. no commitment Predicts distaste for insuring losses when risk is a surprise But first-order risk aversion when risk, possibility of insurance is anticipated Expectation of taking on risk decreases aversion to both anticipated and any additional risk For large-scale risk, consumption utility dominates
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Intro RD Risk Attitudes Framing & Choice-Bracketing Unanticipated Risk Thinking about low-probability situations, model in extreme form as situations where expectations are exogenous.
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This note was uploaded on 12/26/2011 for the course ECON 227A taught by Professor Grossman during the Fall '09 term at UCSB.

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KR2_Framing_1 - Intro RD Risk Attitudes RD Risk Attitudes...

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