Final exam econ 115 practice.pdf

# Signal about the quality of the item hence it is

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neg. Signal about the quality of the item, hence it is rational to bid less than your current evaluation of the item at the auction Concerns about the integrity of the auction. If ebay is rigged and will always produce a second highest bid close to the winning one, then it is rational to bid less than the private value. Bid shading is one reason why first-price auctions are becoming more popular in real time bidding (RTB). This is called the invasion of first-price auctions Impatience the sooner the better. Now is the best.- These patterns are called impatience . It is a part of all standard economic models. It holds in most experiments as well, with some exceptions. Here anticipatory utility can play a role:people can get some utility from anticipation of future consumption . Term warning : expected utility is a standard economic model, anticipatory utility is a psychological concept. People can prefer improving sequences to declining or roller-coaster ones. Lowenstein and Sicherman (91): increasing wage profiles are preferred to decreasing ones that conferred the same amount or more money. Choose between \$100 now \$110 in one year Choose between \$100 in five years \$110 in six years. If your choices are the same, then they satisfy time stationarity . If rewards are delayed by the same period (five years), then the preference is maintained. Thaler (81) called this phenomenon hyperbolic discounting.U(c 0 , c 1 …, c T ) = Σ t = 0, 1,…, T δ t u(c t ) δ = 1/(1+ρ) = e -r In experiments, the discount rates ρ and r are declining as t increases. This behavioral pattern is called hyperbolic discounting. Preference reversals can be caused by temptations Discounted Utility Model people maximize the discounted utility U(c 0 , c 1 …, c T ) = Σ t = 0, 1,…, T δ t u(c t ) where δ describes the discount factor . One can write δ = 1/(1+ρ). ρ>0 is equivalent to δ< 1. This case is called positive discounting . In exponential form, U(c 0 , c 1 …, c T ) = Σ t = 0, 1,…, T e -rt u(c t )

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ρ and r are called discount rates . These models are equivalent for δ = 1/(1+ρ) = e -r Psychological and rational reasons for discounting: Uncertainty of life, urge for instant gratification, costly self-denial, underestimation of future wants. - DUM implies completeness transitivity invariance to framing (reflexivity) no context effects. Consumption Independence is problematic for more specific rewards (like food, entertainment, etc) because of preference for diversity . For example, the preference between Italian and Thai restaurant can be strongly affected by where the person dined last night. The agent may prefer sequences I T > I I but T I > T T These preferences violate the discounted utility model. Testable Implications of DUM Time-Invariant Instantaneous Utility: Preferences do not change over time.
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