Introduction to Behavioural Economics

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Questions and Answers

What is the primary focus of behavioral economics?

It enhances traditional economics by incorporating psychological insights. (correct)

It aims to develop theories that ignore psychological factors.

It seeks to replace the standard economic framework completely.

It strictly adheres to classical economic assumptions.

What is the endowment effect in behavioral economics?

A tendency to favor new acquisitions over old ones.

A phenomenon where people sell their possessions quickly.

The inclination to avoid making economic decisions.

The tendency to overvalue what one already owns. (correct)

Which of the following describes the relationship between behavioral economics and the standard model?

Behavioral economics operates independently without reference to traditional models.

Behavioral economics adds to the standard models by acknowledging psychological factors. (correct)

Behavioral economics is a subset of neoclassical economics.

Behavioral economics completely disputes the standard economic theories.

Which of the following best describes the use of assumptions in economic theories?

Assumptions are pivotal and should be explicitly stated for clarity. Signup and view all the answers

What does the term 'alternative costs' refer to in economic decision-making?

The forgone benefits of the next best alternative when a choice is made. Signup and view all the answers

What does it mean if a theory’s empirical implications are inaccurate?

The assumptions underpinning the theory may be flawed. Signup and view all the answers

What type of research do economists conduct to better understand economic phenomena?

Development of theories that explain relationships between phenomena. Signup and view all the answers

What usually characterizes implicit assumptions in an economic theory?

They are understood but not specifically articulated. Signup and view all the answers

What do standard models typically assume about decision-making?

They aim to describe behavior while also prescribing how it should happen. Signup and view all the answers

In the context of economics, what distinguishes positive economics from normative economics?

Positive economics explains 'what is,' while normative economics addresses 'what ought to be.' Signup and view all the answers

Which of the following statements about static and dynamic models is true?

Static models do not account for time, limiting their accuracy in economic predictions. Signup and view all the answers

What does the axiom of completeness in consumer theory imply?

Individuals can compare all possible alternatives. Signup and view all the answers

What is a potential implication of integrating positive and normative economics?

It creates a clearer and more practical foundation for public policy-making. Signup and view all the answers

Transitivity in consumer choice means that if A is preferred to B and B is preferred to C, what can be inferred?

A is preferred to C. Signup and view all the answers

Which economic assumption states that individuals prefer more of a good rather than less?

Monotonicity Signup and view all the answers

What role do assumptions play in standard economic models?

They make the models more rigid, potentially oversimplifying real-world behaviors. Signup and view all the answers

What does 'bounded rationality' refer to in decision-making?

Limitations in knowledge and cognitive processing. Signup and view all the answers

How do economists view the decision-making model of rationality?

It describes how people behave while also suggesting how they should behave. Signup and view all the answers

In the context of behavioral perspective on rationality, what is 'enlightened self-interest'?

Considering the interests of others leads to self-benefit. Signup and view all the answers

What is a central component of the simple market equilibrium model?

It illustrates the resulting equilibrium over a time dimension. Signup and view all the answers

What does the heuristic approach in decision-making highlight?

Use of rules of thumb due to cognitive limitations. Signup and view all the answers

What role do objective and subjective statements play in economics?

Objective statements can be tested, while subjective statements reflect individual opinions. Signup and view all the answers

What is a consequence of social desirability bias in self-reported data?

Underreporting of socially unacceptable behavior. Signup and view all the answers

Which of the following is seen as a limitation of the standard model in consumer theory?

Over-reliance on rationality assumptions. Signup and view all the answers

Study Notes

Introduction to Behavioral Economics

Economics studies the allocation of scarce resources and decisions influenced by alternative costs.
Behavioral economics enhances traditional economic analysis by incorporating realistic psychological factors.
Key decisions, like charitable donations or selecting courses, often involve trade-offs and perceptions of value.

Economists' Purpose

Economists develop theories to explain economic relationships and phenomena.
The property boom before 2007 serves as an example of economic behavior influenced by psychological phenomena like the endowment effect.
The endowment effect illustrates how individuals reluctant to sell assets at lower prices despite rational economic reasoning.

Standard Models vs. Behavioral Economics

Standard models (neoclassical economics) help understand economics despite unrealistic assumptions.
Static models (e.g., market equilibrium) contrast with dynamic behavioral models, emphasizing the importance of time in economic processes.
The law of demand operates on assumptions which may not always reflect real-world complexities.

Positive vs. Normative Economics

Positive economics focuses on factual, testable information regarding behavior ("What is?").
Normative economics deals with subjective statements about what ought to be ("What should be?").
Integration of both approaches is essential for public and private policy formation, influencing matters like healthcare and subsidy decisions.

Decision-Making Models

Economists simplify decision-making with strict assumptions: completeness (preference ordering) and transitivity (consistent choices).
Additional assumptions like monotonicity (more is preferred to less) and convexity (averages preferred to extremes) further shape economic models.
Standard models often overlook uncertainty and real human behavior in decision-making.

Bounded Rationality and Heuristics

Bounded rationality refers to limited knowledge affecting decision-making, illustrated by health insurance choices and retirement savings.
People make decisions based on heuristics, or rules of thumb, due to cognitive and time constraints.
Decision-making is also influenced by attitudes, beliefs, and social biases, complicating standard economic assumptions.

Limitations of Standard Models

Standard economic models possess restrictive assumptions, potentially rendering them incomplete.
Human behavior's complexity demands a broader understanding beyond traditional rational frameworks.

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Description

Explore the contrasts between the Standard Model and Behavioural Economics through real-world applications. This quiz examines how these economic principles apply to everyday decisions, from charitable donations to resource allocation. Test your understanding of behavioural concepts in economic theories.