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Microeconomics Chp 8
| Term | Definition |
|---|---|
| Neoclassical economics | We believe our decisions are rational, but evidence shows we make systematic errors (the same errors over and over again) |
| Behavioral economics | Emotional decision making Focusing on the mental process behind decisions. Improving outcomes by improving decision making. developed to explain systematic errors |
| Neoclassical economics assumptions: | People have stable preferences that aren’t affected by context. People are eager and accurate calculating machines. People are good planners who possess plenty of willpower. People are almost entirely selfish and self-interested |
| Heuristics | low-energy mental shortcuts that help individuals make decisions and solve problems quickly and efficiently Ex: -Catching a baseball with the gaze heuristic. -Riding a bicycle with steering heuristics |
| Brain Modularity System 1 | uses a lot of heuristics in older parts of the brain |
| Brain Modularity System 2 | uses newer parts of brain for slow, deliberate, and conscious calculations of costs and benefits |
| Cognitive biases | lead individuals and businesses to make irrational choices based on psychological factors rather than objective data. -Confirmation bias -Self-serving bias -Overconfidence effect -Hindsight bias -Availability heuristic -Planning fallacy -Framin |
| Prospect Theory | a behavioral economic theory that describes how humans make decisions involving risk and uncertainty it suggests that individuals prefer to avoid losses rather than acquire gains -status quo |
| Loss aversion (Pros. Theory) | when people feel losses much more intensely than gains Ex: gambling |
| Prospect Theory Examples | Losses and shrinking packages Framing effects and advertising Anchoring and credit card bills Mental accounting and overpriced warranties The endowment effect and market transactions Status quo bias |
| Myopia and time inconsistency | Fighting self-control problems with pre-commitments: -Automatic payroll deductions -Salary smoothing -Early withdrawal penalties |
| Myopia | a tendency for individuals or investors to focus on short-term gains and immediate rewards while neglecting long-term consequences |
| Time inconsistency | a situation where a decision-maker's preferences change over time, leading to decisions that may not align with their original intentions |
| Experimental evidence for fairness: | The dictator game The ultimatum game The rules How players behave Why the threat of rejection increases cooperation Implications for market efficiency |
Created by:
Phillies55
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