Exam 17: Behavioral Economics

Jan is a hyperbolic discounter. She puts weight 1 on utility earned in the current period but only weight .5 on utility earned in future periods. In period 1 she comes up with a plan,which involves taking some action that leads to a loss of C utils in period 2 but provides a benefit of B utils in period 3. What values of B and C will lead her to behave inconsistently and not follow through on her plans?

Limits to self-interested payoff maximization that have been studied by behavioral economists include

An individual has preferences consistent with prospect theory. The person takes their current wealth of $10,000 (plus any certain additions)as their reference point. Gains above this reference point are worth +1 util. Losses below this reference point are worth -2 utils. The person is faced with two choice problems. The first involves a choice between (A)no gamble and (B)a gamble with an equal chance of winning $1,800 and losing $1,000. The second choice problem,the person first has $1,000 taken away (resulting in the adjustment of the reference point). The choice is then between (C)being given back $1,000 for sure and (D)an equal chance of winning $2,800 or nothing. What choices would the person make?

Which of the following would make a player more inclined to continue into later stages of the Centipede Game rather than ending the game immediately? (Choose all that apply.)

When psychologists refer to the "Paradox of Choice",what do they mean?

Consider a version of the ultimatum game in which player A makes an integer offer {1,2 …,9} to player B. If B accepts,he or she gets that amount of money and A gets to keep the remainder of $10. If B rejects,both get nothing. Which of the following is an offer that arises in a subgame-perfect equilibrium assuming players only care about monetary payoffs?

Which is not a factor that makes cognitive mistakes more likely?

Which of the following weights on utility (over four periods starting with the current one)provide an illustration of hyperbolic discounting that could well lead to inconsistent choices over time?

An individual has preferences consistent with standard expected utility theory. They have utility function U(x)over wealth x. Starting with initial wealth of $10,000,the person is then faced with two choice problems. The first involves a choice between (A)no gamble and (B)a gamble with an equal chance of winning $1,800 and losing $1,000. The second choice problem,the person first has $1,000 taken away (resulting in the adjustment of the reference point). The choice is then between (C)being given back $1,000 for sure and (D)an equal chance of winning $2,800 or nothing. What can be said about the choices the person would make?

People are sometimes seen to give up money to make an allocation more fair. What experiment could be used to determine if this is because people truly care about fairness or because people want to avoid the consequences of others' spite?

In what way does prospect theory differ from the standard theory of expected utility?

Consider the same ultimatum game as in the previous question but consider some new preferences reflecting a desire for fairness. In particular,now assume players get 1 util per dollar earned but lose 1/4 util for the absolute difference between their monetary payoffs. Which of the following is an offer that arises in a subgame-perfect equilibrium with these new preferences?

The option-value principle can be roughly stated as "more choices can't make a person worse off." Are there any exceptions to this rule? Choose all that apply.?

Return to the case of Jan,the hyperbolic discounter from the previous question. What values of B and C will lead her to be consistent with a plan not to undertake the action?

Supply in the market for cigarettes is perfectly competitive,given by the function Q_S = P. True demand in the market is Q_D = 100 - P. Due to behavioral biases (of whatever form,whether people have limited willpower or have limited cognitive abilities to process the actual health effects of smoking),people overestimate the value of cigarettes,leading to the perceived demand curve $Q _ { D } = 200 - P$ .Compute the deadweight loss from the overconsumption generated by this behavioral bias. (Hint: use the perceived demand curve to compute market equilibrium but make your welfare calculations using the true demand curve.)

What are the main differences between neoclassical economics and behavioral economics?

Return to the case of Jan,the hyperbolic discounter from the previous question. Suppose she can sign a contract that requires her to give up money equivalent to a loss of X utils if she does not undertake the action. Assume she does not behave consistent with her plans without this contract. How high would the contractual value of X have to be to prevent her inconsistency?

An economist encounters some unexpected behavior in a market or laboratory setting. How can he or she distinguish between behavior resulting from mistakes by decision makers as opposed to being decisions based on unusual preferences?

Return to the case of Jan,the hyperbolic discounter from the previous question. What values of B and C will lead her to be consistent with a plan to undertake the action?

The government is considering a mandatory savings program that forces people to save 8% of their income each year for retirement. What behavioral biases might be used as a justification for such a program? (Choose all that apply.)?