September 9th , 2015
ECON 436 Fall 2015
Econ 436 - Homework #1
th
Due: September 16 , 2015
1. As part of you answer to the following questions, make
sure to specify what the universe is.
(a) Given an example of a relation that is complete but
not transiti

1. (a) The relation is right before with the universe Summer Semester, Fall Semester, Spring Semester (there are
only three semesters). (b) The relation is a sibling of
with the universe everyone currently living.
Coee
Coee
2. First write down the Denitio

NBER WORKING PAPER SERIES
GENDER DIFFERENCES IN RISK AVERSION AND AMBIGUITY AVERSION
Lex Borghans
Bart H.H. Golsteyn
James J. Heckman
Huub Meijers
Working Paper 14713
http:/www.nber.org/papers/w14713
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts

Conrmation Bias
Conrmation Bias Types:
Examples: Biased search for information
ECON 436 Chapter 4 Probability Theory and Judgement Page 1 of 2 Wednesday September 30th , 2015
hypothesis
rent to murder. This choice Procedure suggests, contending factions i

Probability Theory and Judgement
Econ 436 - Behavioral Economics
September 16th , 2015
Probability
Probability Theory developed because of gambling.
Gambling is essentially as old as the human record.
Dice date back at least 5000 years.
Found at Burnt Cit

Example
You live in a country with 1 billion people.
Consider a very rare disease that only aects 1 out of every 100,000 people.
Test is 99.99% accurate.
You take test, and it is positive.
What is probability that you have the disease?
Base Rate Neglect
T

Total Probability
What is P(A)?
Proposition (Law of Total Probability)
B
A
C
D
E
Total Probability Example
Suppose that two factories supply light bulbs to the market.
Factory As bulbs work for over 5000 hours in 99% of cases
Factory Bs bulbs work for ove

Hot-Hand Fallacy
Hot-Hand Fallacy Examples:
Thomas Gilovich, Robert Vallone, and Amos Tversky (1985)
Andrew Bocskocsky, John Ezekowitz, and Carolyn Stein (2013)
Zwiebel and Green (2014) Craps
Werner DeBondt and Richard Thaler -
Conjunction Fallacy
Linda i

Exercise
You have two things to do today:
Clean the house (2 utiles)
Watch a movie (12 utiles)
1
Watch First
1/2
1/3
Clean First
1/2
How would you choose?
Utility
Preference over proles
Duration
ECON 436 Chapter 9 Intertemporal Choice Page 1 of 2 Wednesda

Commitment Devices
Types of Hyperbolic Discounters
Naive hyperbolic discounter
Sophisticated hyperbolic discounter
ECON 436 Chapter 9 Intertemporal Choice Page 1 of 2 Monday November 02nd , 2015
Example
Your local cinema theater oers a mediocre movie this

Intertemporal Choice
Econ 436 - Behavioral Economics
October 28th , 2015
Time Consistency
You can either receive:
A: $20 on December 1st 2015
B: $21 on December 11th 2015
Time consistent If you choose B over A on October 28th ,
Time inconsistent If you ch

Example #1: Gamble #1
100%
89%
Bet 1(a)
Bet 1(b)
10%
0%
0%
$0
$1 million
1%
$5 million
$0
$1 million
$5 million
Example #1: Gamble #2
90%
89%
Bet 2(a)
Bet 2(b)
11%
10%
0%
$0
$1 million
$5 million
0%
$0
$1 million
$5 million
ECON 436 Chapter 7 Decision Mak

The Discounted Utility Model
Econ 436 - Behavioral Economics
October 26th , 2015
Interest
When you borrow (lend) money you pay (receive) interest.
Terminology:
Principal Interest Interest rate Liability Example: You borrow $100 for 1 year at an annual int

Example
You have two lotteries to win $250. One oers a 5% chance to win the prize and
the other oers a 30% chance to win the prize.
A: You can improve the chances of winning the 1st lottery from 5% to 10%.
B: You can improve the chances of winning the 2nd

Decision Making Under Risk and Uncertainty
Econ 436 - Behavioral Economics
October 14th , 2015
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
dis

Example
Utility
How many hour per week would you work
to get salary of $100 mil/year?
If you have $0 in the bank?
If you have $10 billion in the bank?
Diminishing Marginal Utility
$
Marginal Utility
$
Expected Utility
Denition (Expected Value)
If there ar

Rational Choice Under Risk and Uncertainty
Econ 436 - Behavioral Economics
October 7th , 2015
Choice under uncertainty
Choice under uncertainty To bring an umbrella or not?
Rain
Sunshine
Bring
Umbrella
Leave
Umbrella
How to make choice?
ECON 436 Chapter 6

Anchoring
Anchoring Examples:
10
65
Tverskey and Kahneman (1974)
What percentage of UN countries are African?
ECON 436 Chapter 3 Decision-Making Under Certainty Page 1 of 6 Monday September 14th , 2015
the fallacy of supply and d e m a n d
Average prices

Agenda
Introduction
Econ 436 - Behavioral Economics
What is Behavioral Economics?
Syllabus
Examples
August 24th , 2015
A Brief History
Tools
What is Behavioral Economics?
I
What is Behavioral Economics?
What is economics?
I
the study of how people choose

Choice Problem
I randomly assign one object to each student.
Three situations: (Graphically)
Utility Functions
Good y
Willingness to Pay
Willingness to Accept
Good x
ECON 436 Chapter 3 Decision-Making Under Certainty Page 1 of 5 Wednesday September 9nd ,

Last Chapter
Rational Choice
Decision-Making Under Certainty
Econ 436 - Behavioral Economics
Rational preferences (transitive and complete)
Choose best item.
Implications:
Rational choice always considers all options.
September 2nd , 2015
More options alw

Preference Ordering
Indierence Curves
Indierence curve -
Preference Ordering -
Contour lines -
Example:
Any two point on indierence curve,
Any two point on dierent indierence curves,
Completeness ensures that there is
Good y
Transitivity ensures that list

Agenda
Rational Choice Under Uncertainty
Preferences
Econ 436 - Behavioral Economics
Rational Preferences
Proofs
August 26th , 2015
Indierence and Strict Preferences
Rational Choice
Binary Relations
A binary relation is used to
Choice under certainty
Goal

1. First notice that,
If EU (A1) > EU (A2) then U (30) > .8U (45)
If EU (B1) > EU (B2) then 0.25U (30) > .2U (45)
then U (30) > .8U (45)
(a) Because of the above, if an individual chooses A1
then they must also choose B1. If an individual
chooses A2, th

October 28th , 2015
ECON 436 Fall 2015
Econ 436 - Homework #4
Due: November 4th , 2015
1. Consider the following four options: (A1) $30 with 100%,
(A2) $45 with 80%, (B1) $30 with 25%, (B2) $45 with
20%.
(a) What choices are consistent with expected utili

1. (a) Small
(b) X = $22100 because the Exp Value of the bet
is,
(b) Large
(c)
EV (Bet) = P (Win) X =
Large
Medium
Small
0
6
7
5
0
5
7
2
0
n 52 (works for every part of the problem)
(a) P (W in) =
(d) Medium
(e) EV (L) =
EV (S) =
expected value.
2.
10
3

October 14th , 2015
ECON 436 Fall 2015
1
Econ 436 - Homework #3
(d) u(x) = x 3
1
Due: October 21st , 2015
1. Consider the following choice under uncertainty:
Demand
Investment
Large
Medium
Small
Large
10
2
-6
Medium
4
7
-1
Small
3
2
1
(a) Determine the ch

1 N
365
1. (a)
1
365
(b)
(c)
N
365
5. (a) The probability of dying on a given mile ying is
1.7
pF = 100,000,000 . Therefore, the probability that
you dont die in a plane crash, is the probability
that you dont die on every single mile, which is,
N 1
N 1
3

September 23rd , 2015
ECON 436 Fall 2015
Econ 436 - Homework #2
th
Due: September 30 , 2015
1. Consider a class with N students. Calculate the following
probabilities: (it may help to answer the question for
N = 2 initially, and work your way up. Also ass