1. Behavioral Finance
Economics 437

2. Concurrent Decisions:
Choose Between:
A: A sure gain of $ 240
B: 25 % gain of $ 1,000 and 75 % chance to gain nothing
C: A sure loss of $ 750
D: 75 % chance to lose $ 1,000 and 25 % chance to lose nothing

3. Oops If you chose A & D: {B & C} dominates {A & D} Choose Between:
A: A sure gain of $ 240
B: 25 % gain of $ 1,000 and 75 % chance to gain nothing
C: A sure loss of $ 750
D: 75 % chance to lose $ 1,000 and 25 % chance to lose nothing
If you chose A & D:
25 % gain of $ 240 and 75 % chance to lose $ 760
{B & C} dominates {A & D}
25 % gain of $ 250 and 75 % chance to lose $ 750

4. Make a choice You have been given $ 2,000
Choose between A and B
A: 50 % chance of losing $ 1,000 or receiving nothing
B: A sure loss of $ 500

5. Make a choice You have been given $ 1,000
Choose between C and D
C: 50 % chance of winning $ 1,000 or receiving nothing
D: A sure $ 500

6. Make a choice
Choose between A and B (assuming you have been given $ 1,000)
A: 50 % chance of winning $ 2,000
B: A sure gain of $ 500
Choose between C and D (assuming you have been given $ 2,000)
C: 50 % chance of losing $ 1,000 or receiving nothing
D: A sure loss of $ 500
A and C are identical
B and D are identical

7. Another Choice Which would you prefer? A: Certain gain of $ 30
B: 80% chance to win $ 45 and 20% chance to win $ 0

8. Another C: 25 % chance to win $ 30 and 75 % chance to win nothing, or
D: 20 % chance to win $ 45 and 80 % chance to win nothing

9. And again A Two Stage Game
75 % chance of ending the game winning nothing and 25 % chance of going to second stage of the game
At second stage
R:Certain win of $ 30, or
S:80% chance to win $ 45 and 20% chance to win nothing

10. [80 % chance of winning $ 45 and 20% chance of winning zero] 25%
25 % chance to win $ 30 and 75 % chance to win zero
20% chance to win $ 45 and 80% chance to win zero
Must choose A or B
before stage one
[A certain win of $ 30]
[80 % chance of winning $ 45 and 20% chance of winning zero]
25%
Game ends, you win zero
75%

11. Two kinds of schools School A has 65 % boys; 35 % girls
School B has 45 % boys; 55 % girls
A class has 55 % boys: Which school is it most likely to be taken from?

12. The problem of “future preferences” (not preferences about the future)
Imagine
One trip to the store to purchase for the entire week
Seven daily trips to the store during the same week
Significantly more variety in the “one trip” case than the sequential trip case

13. Framing possibilities with intertemporal choice
You purchase a TV set on installment plan
Choose: (later payment is in six months)
A. An initial payment of $ 160 and a later payment of $ 110
B. An initial payment of $ 115 and a later payment of $ 160

14. Framing possibilities with intertemporal choice
You purchase a TV set on installment plan. You pay $ 200 now and $ 200 in six months
Choose:
C. A rebate of $ 40 on the initial payment and a rebate of $ 90 on the later payment
D. A rebate of $ 85 on the initial payment and a rebate of $ 40 on the later payment

15. Usual outcome 54 percent preferred A to B
Only 33 percent preferred C to D

16. The End