14-02-2013, 03:23 PM
Behavioral Economics
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Motivations and Objectives
The two main motivations for behavioral economics concern apparent weaknesses in standard economic theory:
People sometimes make choices that are difficult to explain with standard economic theory
Standard economic theory can lead to seemingly unreasonable conclusions about consumer welfare
Behavioral economics grew out of research in psychology
The objective is to modify, supplement, and enrich economic theory by adding insights from psychology
Suggesting that people care about things standard theory typically ignores, like fairness or status
Allowing for the possibility of mistakes
Disadvantages of Experiments
Decisions made in the lab differ from decisions made in the real world
Introduce influences on decision-making that are hard to measure or control
Strong evidence that subjects often try to conform to what they think are the experimenter’s expectations
Most subjects are students, thus not representative of the general population
Also inexperienced at making economic decisions
Scale of any given experiment is limited by the available resources
Evaluating Behavioral Evidence
Critical questions about behavioral research that appears inconsistent with standard economic theory:
Is the evidence convincing? Was the experiment well-designed?
Is the observed behavioral pattern robust?
What are the possible explanations? Can we reconcile this with standard theory?
If theory appears to fail in a significant situation, how should we modify the theory?
Incoherent Choices:Choice Reversals
Laboratory subjects sometimes display incoherent choice behavior
Circular choices indicate preferences that violate the Ranking Principle
Example: a participant in an experiment
Values a low stakes bet at $3.40 and a high stakes bet at $3.60
Chooses the low stakes bet
Include $3.50 as a third choice; no way to rank these three options from best to worst
Incoherent Choices:Anchoring
Anchoring occurs when someone’s choices are linked to prominent but irrelevant information
Suggests that some choices are arbitrary and can’t reflect meaningful preferences
Example: experiment showing subjects’ willingness to pay for various goods was closely related to the last two digits of their social security number, by suggestion
Skeptics note that subjects had little experience purchasing the goods in the experiment
Might have been less sensitive to suggestion if used familiar products
Significance of anchoring effects for many economic choices remains unclear