Context effects violate weak axiom of revealed

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Context effects violate Weak axiom of revealed preference and present observations: How can context effects happen? Social norms (do not take the last item) Aversion of extremes (do not buy the cheapest item) Reason-based choice (pick alternative x if x dominates z, pick alternative y if y dominates z) Avoidance of complex decisions (e.g avoid the choice whenever there are more than three options available). 1/n heuristic Mental accounting A standard assumption in economics is that all accounts are fungible and can serve equally well for all purposes. Yet if people maintain separate accounts for various transactions, then the shape of the value function suggests that People should segregate small gains from bigger transactions. Examples: gift making, preference for discounted goods, setting daily goals for earnings etc. People should integrate small losses with bigger transactions. Examples: flat rate bias in the gym memberships, avoiding news about individual stock prices on bad days. The standard models of decision making include: Utility maximization Expected utility/expected value/risk aversion Bayesian updating Some behavioral models are: Prospect theory Semiorders Maxmin Expected Utility All of these models are written for a single agent. Altruism is behavior that benefits others, but involves a cost to the originator of the behavior without any material benefit. Spite is the opposite. It imposes a cost on others as well as on the originator, without any material benefit for the latter. In order to avoid fairness concerns, firms may •avoid raising prices (e.g. tickets to popular events, food and water before a hurricane). Result: lines and waiting periods. Markets do not clear. •avoid lowering wages even in recessions. Result: unemployment . Markets do not clear. use temporary discounts and bonuses and avoid the perception that prices are increased. This policy is also profitable because of mental accounting.
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Game theory: standard tool for studying strategic behavior of several players -behavior of each player should take into account the behavior of others and mutual recognition of this interdependence (ex. Auctions, politics, real games) -each game has 3 features: Players(agents who play), strategies(actions they take), payoffs(outcomes of the game for each player) -Usually given in numerical form and expected utility is assumed Standard models of game theory: Dominant strategy equilibrium Iterated dominance. Backward induction Nash equilibrium in pure strategies (no randomization) Nash equilibrium in mixed strategies (randomization) Each of these concepts is stronger than the next: Dominant strategy-->iterated-->pure str.-->mixed strategies Each of these concepts is stronger than the next: Dominant strategy-->iterated-->pure str.-->mixed strategies Dominant strategy: serves best under all circumstances -If each player has a dominant strategy, the outcome is called dominant strategy equilibrium(ex.
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