Introduction to Behavioral Economics

LEFT RIGHT

It is the result of thinking, not the process of thinking, that appears spontaneously in consciousness.

George Miller

Biases or Shortcuts• Anchoring• Availability• Representativeness• Optimism and overconfidence• Gains and Losses• Status Quo• Framing

• AnchoringThe concept of anchoring draws on the tendency to attach or "anchor" our thoughts to a reference point - even though it may have no logical relevance to the decision at hand. It is an art of how you ask the question, how you set the anchor.

• Known anchoring methods–Multiple unit pricing–Purchase quantity limits–Initial price setting–Subconcious anchoring

• AvailabilityThe availability bias is a mental shortcut that relies on immediate examples that come to mind.

• Hedonic AdaptationLimited joy makes us happier than unlimited joy

• The goal gradient effect

If there is a progress we tend to finish

Bank workerorBank worker and active in the feminist movement?

• Expectancy Effect

Pattern recognition based on expectations

• Optimism and overconfidence

MBA students were asked the probability to be lower than %50 of grades, only %5 expected to be below the median

• Gains and losses (endowment effect)

Losing something makes you twice as miserable as gaining the same thing makes you happy.

–Visualization–Framing

• Status Quo

To maintain the status quo is to keep the things the way they presently are.

• Hindsight bias–Better-educated soldiers suffered more

adjustment problems than did less-educated soldiers.–White privates were more eager for

promotion than were Black privates.

• Change Blindness– Perceptual phenomenon that occurs

when a change in a visual stimulus is introduced and the observer does not notice it.

• RegretStay passive to remain invulnurable to regret

• PoignancyEmpathy for people in regret

• FramingIt is an inevitable process of selective influence over the individual's perception of the meanings attributed to words or phrases

• Decision point

• Transaction cost

• Reminder

• Intervention

• Mental Accounting

The concept defined by the economist Richard Thaler that states people split up their future and current assets into separate portions that cannot be transferred. It states that people give different value to different asset groups and this determines purchasing decisions.

• Sunk cost effect

The sunk cost effect is the tendency for humans to continue investing in something that clearly isn't working.

• Choice overloadMany choices cause complicated computation resulting with psychological pressure.

– Regret– Joint Evaluation vs Seperate

Evaluation

PRIMING• Associative coherence• Repetition (direct priming)• Semantic• Response priming• Masked priming

• Associative Coherence

BANANAS VOMIT

• Repetition

DOGDOGDOGDOG

• Semantic priming

DOG WOLF

• Response priming

COGNITIVE EASE• Different Reports Experiment–Taahhut VS Artan

• Stocks statistics–KAR & LUNMO VS PXG & RDO

• Happiness increases easier options

False Consensus Effect• There is a tendency for people to assume

that their own opinions, beliefs, preferences, values, and habits are "normal" and that others also think the same way that they do.

Fundamental Attribution Error• is people's tendency to place an undue

emphasis on internal characteristics to explain someone else's behavior in a given situation, rather than considering external factors.

Actor-observer bias• People tend to overemphasize the role of

a situation in their behaviors and underemphasize the role of their own personalities.

INTUITION VS ALGORITHMS

BAD EVENTS

• The brains of humans contain a mechanism that is designed to give priority to bad news.

RARE EVENTS

• Decision weight change from 0% to 1% is a lot higher than %50 to %51

THE PLANNING FALLACY

• Unrealistically close to best-case scenarios

Bernoulli Utility Function

Prospect Theory

Prospect Theory

1. You are given $1000a) 50% chance to win $1000b) $500 for sure

2. You are given $2000a) 50% chance to lose $1000b) Lose $500 for sure

Imperfection of Prospect Theory

1. Problema) 90% chance to win $1 millionb) $50 for sure

2. Problema) 90% chance to win $1 millionb) $150,000 for sure

WELL BEING

• Peak-end rule• Duration neglect• The experiencing self vs. the

remembering self

Tastes and Decisions are Shaped by Memories, and the

memories can be wrong

Remembering Self VS

Experiencing Self

The resistance to interruption is a sign that you are having a

good time

JOB SATISFACTION

HAPPINESS

GOVERNMENT INVESTMENT

EXPERIMENTING

• Cause -> mediator -> effect• Pennies a day -> perception of

affordability -> greater spending• Daily payment amount -> moderator• Field experiments & Lab experiments

• ANOVAAnalysis of variance (ANOVA) is a collection of statistical models used to analyze the differences between group means and their associated procedures.

CAN HÜZMELİcanhuzmeli@gmail.com