{ "cells": [ { "cell_type": "markdown", "id": "82048bd0", "metadata": {}, "source": [ "## CS 458: Behavioral Economics\n", "

\n", "\n", " " ] }, { "cell_type": "markdown", "id": "98e6f54a", "metadata": {}, "source": [ "We mentioned Herbert Simon, who won the Nobel Prize in Economics in 1978 for his theory of bounded rationality. Simon was at the forefront of behavioral economics.\n", "\n", "Others include\n", "\n", "- Amos Tversky and Daniel Kahnemann, psychologists developed prospect theory which reflected psychological experiments of economic decision theory in \n", "human subjects. Kahnemann won the Nobel Prize in 2002. Tversky died in 1996.\n", "\n", "- Robert Shiller (of Yale) won the Nobel Prize in 2013 for work in behavioral finance, for empirical analysis of asset prices, including the \"efficient market hypothesis.\" \n", "\n", "- Richard Thaler developed nudge theory, won the Nobel Prize in 2017." ] }, { "cell_type": "markdown", "id": "0704bb2b", "metadata": {}, "source": [ "

Prospect Theory

\n", "\n", "Kahnemann and Tversky were psychologists who published over 200 papers that tested the \n", "assumptions of economic decision theory. They ran experiments on human subjects that showed that people do not always make decisions that would be predicted by economic decision theory.\n", "\n", "Most economists were reluctant to acknowledge the results. They would refer to the \n", "experimental results as anomalies.\n", "\n", "The phenomena identified by Tversky and Kahnemann and others included:\n", "\n", "#### Anchoring\n", "\n", "Various studies have shown that anchoring is very difficult to avoid. For example, in one study students were given anchors that were wrong. They were asked whether Mahatma Gandhi died before or after age 9, or before or after age 140. Clearly neither of these anchors can be correct, but when the two groups were asked to suggest when they thought he had died, they guessed significantly differently (average age of 50 vs. average age of 67).\n", "\n", "Another example would be a resident of Chicago who is asked to guess the population of Milwaukee. Knowing that Milwaukee is a major city, but certainly not as large as Chicago, the person would take the population of Chicago (roughly 3 million) and divide it by, say, three (arriving at one million). A resident of Green Bay (which has a population of around 100,000) might know that Milwaukee is larger than Green Bay, and triple the population of their home city to arrive at a guess (of 300,000). The difference in guesses of people because of their geographical location is an instance of anchoring. The real population of Milwaukee is about 580,000.\n", "\n", "#### Framing effect\n", " \n", "See medical treatment examples.\n", "This effect has been shown in other contexts:\n", "\n", "- 93% of PhD students registered early when a penalty fee for late registration was emphasized, with only 67% doing so when this was presented as a discount for earlier registration.\n", "\n", "- 62% of people disagreed with allowing \"public condemnation of democracy\", but only 46% of people agreed that it was right to \"forbid public condemnation of democracy\".\n", "\n", "- More people will support an economic policy if the employment rate is emphasised than when the associated unemployment rate is highlighted.\n", "\n", "- It has been argued that pretrial detention may increase a defendant's willingness to accept a plea bargain, since imprisonment, rather than freedom, will be his baseline, and pleading guilty will be viewed as an event that will cause his earlier release rather than as an event that will put him in prison. \n", "\n", " \n", "#### Loss aversion\n", "\n", "(demonstrated in monkeys at Yale by Keith Chen and Laurie Santos) Also Economist article\n", "\n", "See also Endowment effect\n", "\n", "Loss aversion in portfolio management (PIMCO).\n", "\n", "#### Status-quo bias\n", " \n", "Automotive insurance consumers and other examples: The US states of New Jersey and Pennsylvania inadvertently ran a real-life experiment providing evidence of status quo bias in the early 1990s. As part of tort law reform programs, citizens were offered two options for their automotive insurance: an expensive option giving them full right to sue and a less expensive option with restricted rights to sue. In New Jersey the cheaper option was the default and most citizens selected it. Only a minority chose the cheaper option in Pennsylvania, where the more expensive option was the default.\n", "\n", "See Nudge by Thaler and Sunstein.\n", " \n", " \n", "\n", "#### Confirmation bias\n", "\n", "\"Persons believing in extrasensory perception (ESP) will keep close track of instances when they were 'thinking about Mom, and then the phone rang and it was her!' Yet they ignore the far more numerous times when (a) they were thinking about Mom and she didn't call and (b) they weren't thinking about Mom and she did call.\n", "\n", "\"They also fail to recognize that if they talk to Mom about every two weeks, their frequency of 'thinking about Mom' will increase near the end of the two-week-interval, thereby increasing the frequency of a 'hit.'\" (see here)\n", "\n", "\n", "Tversky and Kahnemann were regular visitors at the Yale AI Lab in the 1980's." ] }, { "cell_type": "code", "execution_count": null, "id": "1863bc84", "metadata": {}, "outputs": [], "source": [] } ], "metadata": { "kernelspec": { "display_name": "Python 3 (ipykernel)", "language": "python", "name": "python3" }, "language_info": { "codemirror_mode": { "name": "ipython", "version": 3 }, "file_extension": ".py", "mimetype": "text/x-python", "name": "python", "nbconvert_exporter": "python", "pygments_lexer": "ipython3", "version": "3.9.7" } }, "nbformat": 4, "nbformat_minor": 5 }