Behavioral Economics Combining Psychology & Economics.

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Presentation transcript:

Behavioral Economics Combining Psychology & Economics

Rational Behavior Economics Traditional economics is based on the assumption that people make rational decisions where the MB ≥ MC . . . . .

Irrational Behavior? . Lesson: We Discount Negative Outcomes Lesson: We overestimate Positive Outcomes

Behavioral Economics Study of the social, cognitive & emotional factors which influence economic decisions making Uses psychological experiments to test human behavior

Intro. Reading 4 min. Rational Behavior Video: https://www.youtube.com/watch?v=wpMLYh-UIsA

Relativity 16% 0% 84% 68% 32%

We rarely choose things in absolute terms Lesson: The “decoy” will often determine which option you pick! We rarely choose things in absolute terms We need to compare choices (things are relative!) We avoid hard comparisons We fear LOSS more than we value GAIN called loss aversion)

Ted Video (17 minutes) What we need to make decisions http://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions.html

Behavioral Economics Recap We admit physical limitations but not cognitive limitations Our eyes, brain (cognition) , memory have serious limitations Our irrational decisions are often predictable & repeatable We can’t compute the value of something alone We make decisions by comparing options: Our decisions change by what we compare (everything is relative!) We avoid hard comparisons: we seek things that are easy to compare “default” option should be to join (organ donation, 401-K plan)

Cognitive Limitations Cognitive Physical Limitations vs. Limitations We don’t accept We accept overtime

Which line is longer?

Got Awareness? http://www.youtube.com/watch?v=Ahg6qcgoay4