Introduction¶

Behavioral economics discards the Assumptions of Classical Economics, and analyzes psychological factors.

How does economics view human behavior?¶

Humans have goal-driven individual behavior with constrained optimization

1. Utility function: What makes people happy
2. Instantaneous
3. Time, Risk, Social Preferences
4. Beliefs: What do people believe about environment
5. Physical environment
6. Others’ behavior
7. Use of information to update beliefs
8. Choice/Decision-making: How do people use the above to make decisions
9. Some influences on behavior are not about utility/beliefs
10. Frames, Defaults, Nudges; heuristics

Social Preferences¶

Classical economics assumes that humans are selfish

Behavioral economics

People care about others, but not pure altruism (behavior that benefits another at one’s own expense)

1. Helping others actually makes you happier
2. To show-off to others
3. Reciprocity
4. Inequality aversion

Game to measure people’s preferences¶

Dictator’s game

Imagine you have been given $10 to split between yourself and another, randomly-chosen person. You can keep any part of the $10, and give the rest to the other person.

2 ways

1. Recipient informed about the circumstances of the decision. Self-image
2. Recipient might never notice (money is wired anonymously). Pure altruism

Anchoring¶

People think in relative terms, not absolute terms of money

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