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Micro: Chapter 9b
Midterm 3
Term | Definition |
---|---|
sunk costs | costs that cannot be impacted by relevant choices; already spent, cant be recovered, so should be ignored; when deciding what to do now, you shouldn't consider them; ie, either way, you've already spent $100 on tickets so do what you want |
rational decisions summary: | either/or= choose the option w/greatest economic profit (implicit costs); "how much"= on the margin (marginal cost vs marginal benefit); sunk cost= ignore, no matter how large |
rational decisions | choose the option that leads to the outcome you prefer; doesn't have to be efficiency/profit; can be rational to choose an option that gives a worse economic payoff bc you care about something else (like warm fuzzy feelings or equity) |
concerns about fairness | "warm fuzzy feeling" and equity; do things that aren't the most efficient because it makes us happy; ex: gift giving other than money |
bounded rationality | taking the time to look at all the options is more costly than just going with an easier choice; the "good enough" method of decision making |
risk adversion | the willingness to sacrifice some potential economic payoff in order to avoid a potential loss; ex: Would you give up one year's salary for a $500,000 coin flip? |
irrational behavior | picking options that have lower economic payoffs and are worse off along all other spectrums as well; 6 types.... |
Misperceiving opportunity costs | people tend to ignore nonmonetary opportunity costs; sometimes people think there's an opportunity cost when there actually isn't (like failing to ignore sunk costs) |
Overconfidence | we think we know more that we actually do; tend to underestimate time and overestimate actual skill level / ability to complete things |
unrealistic expectations about future behavior | people tend to be overly optimistic; thinking your future self is better than it is; ex: "I'll quit smoking tomorrow" "There's plenty of time left to study" |
counting dollars unequally and mental accounting | ma= habit of mentally assigning dollars to different accounts so that some dollars are worth more than others; ex: setting aside money from grandma for something "fun," easier to spend flex than actual money |
loss aversion | oversensitivity to loss, leading to an unwillingness to recognize a loss and move on; it's hard to accept failure, like trying to win money back at a casino instead of giving up; explains why sunk costs are so hard to ignore |
status quo bias | tendency to avoid making a decision and sticking with the status quo; opt in vs. opt out; paradox of choice (harder to choose when you are presented with a lot of options); "the best decision is no decision" |
Are models still good enough? | Yeah... still provide robust predictions; a person might act weird but people act rationally; rationality will win out over time in individual people anyway; makes modeling simpler anyway |