1. Behavioral Economics
Combining Psychology & Economics

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

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

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

6. Intro. Reading
4 min. Rational Behavior Video:

7. Relativity
16% 0%
84%
68%
32%

8. 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)

9. Ted Video (17 minutes) What we need to make decisions

10. 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)

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

12. Which line is longer?

17. Got Awareness?