Chapter 8 Behavioral Economics Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8-2 Comparing Behavioral Economics with Neoclassical Economics Neoclassical Economics People have stable preferences that aren’t affected by context People are eager and accurate calculating machines People are good planners who possess plenty of willpower People are almost entirely selfish and self- interested LO1

8-3 Behavioral Economics Focusing on the mental process behind decisions Improving outcomes by improving decision- making Comparing Behavioral Economics with Neoclassical Economics LO1

8-4 Viewing behavioral economics and neoclassical economics as complements Neoclassical economics at the supermarket Behavioral economics at the supermarket Complementary explanations at the supermarket Comparing Behavioral Economics with Neoclassical Economics LO1

8-5 Behavioral Economics vs. Neoclassical Economics LO1

8-6 Our Efficient, Error-prone Brains Heuristics are energy savers Riding a bicycle with steering heuristics Guesstimating ranks with the recognition heuristics The implications of hardwired heuristics LO2

8-7 Brain Modularity System 1 and System 2 Cognitive Biases Confirmation Bias Overconfidence Effect Availability Heuristic Planning Fallacy Framing Effects Our Efficient, Error-prone Brains LO2

8-8 Prospect Theory People judge good things and bad things in relative terms, as gains and losses, or status quo People experience both diminishing marginal utility for gains as well as diminishing marginal disutility for losses People experience loss aversion LO3

8-9 Losses and shrinking packages Framing effects and advertising Anchoring and credit card bills Mental accounting and overpriced warranties The endowment effect and market transactions Status quo bias Prospect Theory LO3

8-10 Global Perspective LO3

8-11 Myopia and Time Inconsistency Myopia Time inconsistency Self-control problems LO4

8-12 Fighting self-control problems with pre- commitments Hiding the alarm clock Automatic payroll deductions Salary smoothing Early withdrawal penalties Weight-loss competitions Myopia and Time Inconsistency LO4

8-13 Fairness and Self-Interest Field evidence for fairness Giving to charity Obeying the law Fixing prices Purchasing the “Fair-Trade” products LO5

8-14 Experimental evidence for fairness The dictator game The ultimate game The rules How players Behave Why the threat of rejection increases cooperation Implications for market efficiency Fairness and Self-Interest LO5

8-15 Nudging People Toward Better Decisions Behavioral economics sought to explain a number of behaviors Used to “nudge” people towards choices that are better for themselves and others