Chapter 8
Behavioral Economics
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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-
interestedLO1
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
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