Econ 440: Lecture 1 - Introduction and Overview

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Questions and Answers

What concept refers to the incorrect beliefs about the rationality of others in economic contexts?

Bounded rationality

Frame sensitivity

Behavioral game theory (correct)

Prospect theory

Which type of data is observational and not designed by the researcher?

Artefactual field experiment

Controlled data

Naturally occurring data (correct)

Framed field experiment

What term describes the phenomenon where individuals show preference for avoiding losses rather than acquiring equivalent gains?

Loss aversion (correct)

Hyperbolic discounting

Bounded rationality

Ambiguity aversion

Which concept relates to the tendency to prefer immediate rewards over larger, delayed gains?

Non-classical time preferences Signup and view all the answers

What is the primary focus of prospect theory in economics?

Decision-making under risk Signup and view all the answers

What is a defining characteristic of bounded rationality in decision-making?

Limited computational power Signup and view all the answers

What distinguishes a lab experiment from a natural field experiment?

Knowledge of participation Signup and view all the answers

What type of field experiment involves subjects being unaware that they are in an experiment?

Natural field experiment Signup and view all the answers

Which of the following describes frame sensitivity in economic decision-making?

Variability in preferences based on presentation format Signup and view all the answers

Which of the following is NOT a type of time preference discussed in economic theory?

Chronic procrastination Signup and view all the answers

What aspect of human behavior does behavioral economics primarily study?

Human behavior inconsistent with the standard economic model Signup and view all the answers

In the context of the two systems of thinking, what characterizes System 1?

It is characterized by fast, intuitive, and often emotional responses. Signup and view all the answers

What does a heuristic refer to in decision-making?

A decision rule that simplifies the decision-making process. Signup and view all the answers

Which of the following is NOT an assumption of the standard economic model?

Individuals demonstrate patience in all decisions Signup and view all the answers

What is a systematic error in decision-making known as?

A bias Signup and view all the answers

Which of the following statements best describes the role of framing in decision-making?

It can significantly change how choices are perceived and made. Signup and view all the answers

According to the content, how does experimental economics primarily differ from traditional economics?

It uses experimental methods to explore economic questions. Signup and view all the answers

What was noted as having some evidence for improving scores in decision-making tasks?

Making the font hard to read Signup and view all the answers

What does the term 'moral dilemmas' signify in the context of experimental economics?

Choices that reflect ethical considerations in decision-making. Signup and view all the answers

What is indicated as a potential reason why replications of studies may not find strong effects?

Heuristics may lead to inadequate responses in different settings. Signup and view all the answers

Study Notes

Introduction to Experimental Economics

Course examines behavioral and experimental economics, emphasizing human decision-making beyond traditional economic theory.
Behavioral economics integrates psychological insights to explain deviations from the "standard model."
Experimental economics employs structured experiments to investigate economic hypotheses.

Cognitive Processing Systems

System 1: Characterized by fast, intuitive responses.
System 2: Involves slow, analytical thinking.
Evidence suggests manipulating font difficulty may push individuals to utilize System 2, potentially improving performance (Alter et al., 2007).

Framing and Heuristics

Identical outcomes (5 deaths vs. 1 death) can yield varied perceptions based on how scenarios are framed.
Influential factors: framing, individual agency, fairness perceptions, and moral dilemmas (e.g., self-driving car ethics via the Moral Machine project).
Heuristics serve as simple decision rules that may lead to biases contrary to standard economic predictions.
Bias can arise from focusing on larger discounts, even if actual benefits are equivalent.

Standard Economic Model Assumptions

Assumes individuals have correct beliefs about the world and their capabilities.
Considers individuals as risk-averse, self-interested, and having infinite cognitive capacity.
Predicts frame-insensitivity in decision-making.

Realistic Behavioral Economic Assumptions

Acknowledges persistent incorrect beliefs (non-Bayesian updating) among individuals.
Highlights limitations in assumptions regarding the rationality of others (behavioral game theory).
Addresses non-standard risk preferences (prospect theory, loss aversion, ambiguity aversion).
Recognizes social preferences and hyperbolic discounting affecting time-related decisions.
Acknowledges bounded rationality, leading to heuristics and sensitivity to framing.

Types of Economic Data

Naturally Occurring Data: Observational data from real-world settings without researcher intervention, includes natural experiments.
Controlled Data:
- Natural field experiments: subjects unaware they're part of an experiment.
- Framed field experiments: subjects aware of their involvement, usually in familiar settings.
- Artefactual field experiments: laboratory-based, engaging subjects in familiar tasks (e.g., medical decision-making).
- Lab experiments involve controlled settings to test hypotheses directly.

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Description

Explore the fundamentals of behavioral and experimental economics in this introductory lecture for Econ 440. Professor Ragan Petrie discusses human behavior deviations from traditional economic theories and the impact of psychology on these fields. Discover how experimental methods are applied to economic questions to enhance understanding.