The Ultimate Behavioral Economics Quiz

Overview of Behavioral Economics

• Behavioral economics studies how psychological, cognitive, emotional, cultural, and social factors influence the decisions of individuals or institutions and how these decisions deviate from classical economic theory.

• Behavioral economics models integrate insights from psychology, neuroscience, and microeconomic theory to understand how market decisions are made and the mechanisms that drive public opinion.

• The field of behavioral economics began in the 1970s and 80s but can be traced back to 18th-century economists such as Adam Smith, who examined how the economic behavior of individuals could be influenced by their desires.

• Behavioral economics was a recent development as a subfield of economics and has been increasingly used in research and teaching.

• Early neoclassical economists incorporated psychological reasoning, but the rejection and elimination of psychology from economics by the neoclassical school in the early 1900s brought on a period defined by a reliance on empiricism.

• The re-emergence of psychology within economics that allowed for the spread of behavioral economics has been associated with the cognitive revolution in the 1960s, which began to shed more light on the brain as an information processing device.

• Bounded rationality is the idea that when individuals make decisions, their rationality is limited by the tractability of the decision problem, their cognitive limitations, and the time available.

• Prospect theory explains various divergences of economic decision-making from neo-classical theory and shows that emotions such as fear of loss or greed can alter decisions, indicating the presence of an irrational decision-making process.

• Nudge theory proposes positive reinforcement and indirect suggestions as ways to influence the behavior and decision-making of groups or individuals, often used in public policy and business management.

• Criticisms of behavioral economics include concerns about ethics, autonomy, and scientific credibility, as well as the underlying normative benchmark of nudging still being homo economicus.

• Behavioral economics concepts include search heuristics, decision-making shortcuts, cognitive biases, and heuristics that affect the decisions that people make to improve, tweak or overhaul traditional economic theory.Heuristics and Biases in Decision Making

• There are three primary search heuristics: satisficing, directed cognition, and elimination by aspects.

• Mental accounting is the propensity to allocate resources for specific purposes.

• Anchoring describes when people have a mental reference point with which they compare results to.

• Herd behavior reflects the tendency of people to mimic what everyone else is doing and follow the general consensus.

• The framing effect is when individuals are presented with the same set of choices, but the choices are framed in a different manner, and this leads to different choices.

• Present bias reflects the human tendency to want rewards sooner.

• The gambler's fallacy is when an individual believes that an event that has occurred frequently in the past is less likely to occur in the future.

• The hot hand fallacy is when an individual believes that an event that has occurred frequently in the past is more likely to occur again in the future.

• Narrative fallacy refers to when people use narratives to connect the dots between random events to make sense of arbitrary information.

• Loss aversion refers to the tendency to place greater weight on losses compared to equivalent gains.

• Familiarity bias describes the tendency of people to return to what they know and are comfortable with.

• Status quo bias describes the tendency of people to keep things the way they are.Behavioral Economics

• Behavioral economics is a field of economics that studies how people make decisions based on psychological and social factors, rather than purely rational factors.

• The field emerged in the 1970s and has gained popularity in recent years due to its ability to explain real-world economic phenomena and predict behavior in various domains.

• Behavioral economics has been applied to a wide range of areas, such as health care, finance, and public policy.

• The field has received criticism from traditional economists who stress the importance of revealed preferences over stated preferences and are skeptical of experimental and survey-based techniques.

• Behavioral economics has been recognized by the Nobel Memorial Prize in Economic Sciences on several occasions, including awards to Herbert Simon, George Akerlof, Michael Spence, Joseph Stiglitz, Daniel Kahneman, Vernon L. Smith, Robert J. Shiller, and Richard Thaler.

• Other notable figures in the field include Andrei Shleifer, Matthew Rabin, and Sendhil Mullainathan.

• Behavioral economics has been compared and contrasted with experimental economics, neuroeconomics, and evolutionary psychology.

• The field has been used to study a variety of topics, such as decision-making under stress, market crashes, and criminal behavior.

• Critics of behavioral economics argue that it lacks a unified theoretical framework and that its findings may not be generalizable.

• Behavioral economics has been applied to supply chain management and has been used to study the behavior of consumers and firms.

• The field has been praised for its ability to provide insights into human behavior and to inform policy decisions.

• The limitations of experimental methods and their use in economics have been analyzed by Angus Deaton.