An introduction to behavioral economics pdf

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An Introduction to Behavioral Economics. QIAO Zhilin(乔志林.) www qiaozhilin com School of Economics & Finance. Special thanks go to Cass Sunstein for writing the introduction to this edition. I am grateful for Both psychologists and economists have investigated the intrinsic value of control, but we need to learn much .. Thaler. Special thanks go to Gerd Gigerenzer for writing the introduction For some behavioral economists, using heuristics seems naïve, even ludicrous. Annoyed by managers .. Wübben.

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Introduction to Behavioral Economics. Igor Asanov. October 28, This handout1 summarizes the lectures slides. Please note that the handout is not very. Request PDF on ResearchGate | On Jan 1, , Nick Wilkinson and others published An Introduction to Behavioral Economics. CHAPTER 1 Nature of Behavioral Economics. Behavioral economics and the standard model. 2. History and evolution of behavioral economics.

These studies draw on the tenets of comparative psychology , where the main goal is to discover analogs to human behavior in experimentally -tractable non-human animals. The evolutionary psychology of economics. In effect, results of demand studies in non-human animals show that, as the bar-pressing requirement cost increase, the number of times an animal presses the bar equal to or greater than the bar-pressing requirement payment decreases. Cameralism Mercantilism Physiocrats School of Salamanca. Political Psychology. Elsevier Science.

March 23, Mullainathan, Sendhil and Richard Thaler. Rabin, Matthew. Berkeley Working Paper E Thaler, Richard and Cass Sunstein. Improving Decisions about Health, Wealth and Happiness. New Haven: Yale University Press, Kahneman, Daniel, Jack L. Knetsch and Richard H. Tversky, Amos and Daniel Kahneman. Heuristics and Biases. Kahneman, Daniel and Amos Tversky. An Analysis of Decision under Risk. Cumulative Representation of Uncertainty.

Knetsch, and Richard Thaler. Thaler, Richard. Laibson, David. O'Donoghue, Ted and Matthew Rabin. AEA Papers and Proceedings 94 2: Behavioral Economics and the Case for Asymmetric Paternalism. Madrian, Brigitte C. Inertia in k Participation and Savings Behavior. Then, during the development of neo-classical economics , economists sought to reshape the discipline as a natural science , deducing behavior from assumptions about the nature of economic agents.

They developed the concept of homo economicus , whose behavior was fundamentally rational. Neo-classical economists did incorporate psychological explanations: Economic psychology emerged in the 20th century in the works of Gabriel Tarde , [10] George Katona , [11] and Laszlo Garai.

An Introduction to Behavioral Economics (3rd ed.)

Observed and repeatable anomalies eventually challenged those hypotheses, and further steps were taken by Maurice Allais , for example, in setting out the Allais paradox , a decision problem he first presented in that contradicts the expected utility hypothesis. In the s cognitive psychology began to shed more light on the brain as an information processing device in contrast to behaviorist models. Psychologists in this field, such as Ward Edwards, [13] Amos Tversky and Daniel Kahneman began to compare their cognitive models of decision-making under risk and uncertainty to economic models of rational behavior.

Mathematical psychology reflects a longstanding interest in preference transitivity and the measurement of utility. 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.

Decision-makers in this view act as satisficers , seeking a satisfactory solution rather than an optimal one. Herbert A. Simon proposed bounded rationality as an alternative basis for the mathematical modeling of decision-making. It complements "rationality as optimization", which views decision-making as a fully rational process of finding an optimal choice given the information available.

Bounded rationality implicates the idea that humans take shortcuts that may lead to suboptimal decision-making. Behavioral economists engage in mapping the decision shortcuts that agents use in order to help increase the effectiveness of human decision-making. A widely cited proposal from Sunstein and Thaler urges that healthier food be placed at sight level in order to increase the likelihood that a person will opt for that choice instead of less healthy option.

Some critics of Nudge have lodged attacks that modifying choice architectures will lead to people becoming worse decision-makers. In , Kahneman and Tversky published Prospect Theory: An Analysis of Decision Under Risk , that used cognitive psychology to explain various divergences of economic decision making from neo-classical theory. In the editing stage, risky situations are simplified using various heuristics. In the evaluation phase, risky alternatives are evaluated using various psychological principles that include:.

Prospect theory is able to explain everything that the two main existing decision theories— expected utility theory and rank dependent utility theory—can explain. Further, prospect theory has been used to explain phenomena that existing decision theories have great difficulty in explaining.

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These include backward bending labor supply curves , asymmetric price elasticities, tax evasion and co-movement of stock prices and consumption. In , in the Journal of Risk and Uncertainty , Kahneman and Tversky gave a revised account of prospect theory that they called cumulative prospect theory. Its main feature was that it allowed for non-linear probability weighting in a cumulative manner, which was originally suggested in John Quiggin 's rank-dependent utility theory. Psychological traits such as overconfidence , projection bias , and the effects of limited attention are now part of the theory.

Other developments include a conference at the University of Chicago , [22] a special behavioral economics edition of the Quarterly Journal of Economics "In Memory of Amos Tversky" , and Kahneman's Nobel Prize for having "integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty". Behavioral economics has been applied to intertemporal choice. Intertemporal choice is defined as making a decision and having the effects of such decision happening in a different time.

Intertemporal choice behavior is largely inconsistent, as exemplified by George Ainslie 's hyperbolic discounting —one of the prominently studied observations—and further developed by David Laibson , Ted O'Donoghue and Matthew Rabin. Hyperbolic discounting describes the tendency to discount outcomes in the near future more than outcomes in the far future. This pattern can also be explained through models of sub-additive discounting that distinguish the delay and interval of discounting: Other branches of behavioral economics enrich the model of the utility function without implying inconsistency in preferences.

Ernst Fehr , Armin Falk , and Rabin studied fairness , inequity aversion and reciprocal altruism , weakening the neoclassical assumption of perfect selfishness. This work is particularly applicable to wage setting.

Behavioral Economics Reading List | RSF

The work on "intrinsic motivation by Gneezy and Rustichini and "identity" by Akerlof and Kranton assumes that agents derive utility from adopting personal and social norms in addition to conditional expected utility.

According to Aggarwal, in addition to behavioral deviations from rational equilibrium, markets are also likely to suffer from lagged responses, search costs, externalities of the commons, and other frictions making it difficult to disentangle behavioral effects in market behavior.

Behavioral economics caught on among the general public with the success of books such as Dan Ariely 's Predictably Irrational. Practitioners of the discipline have studied quasi-public policy topics such as broadband mapping. Applications for behavioral economics include the modeling of the consumer decision-making process for applications in artificial intelligence and machine learning. Applications of behavioral economics also exist in other disciplines, for example in the area of supply chain management.

From a biological point of view, human behaviors are essentially the same during crises accompanied by stock market crashes and during bubble growth when share prices exceed historic highs.

During those periods, most market participants see something new for themselves, and this inevitably induces a stress response in them with accompanying changes in their endocrine profiles and motivations.

Behavioral to pdf introduction an economics

The result is quantitative and qualitative changes in behavior. This is one example where behavior affecting economics and finance can be observed and variably-contrasted using behavioral economics.

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Behavioral economics' usefulness applies beyond environments similar to stock exchanges. Selfish-reasoning, 'adult behaviors', and similar, can be identified within criminal-concealment s , and legal-deficiencies and neglect of different types can be observed and discovered. Awareness of indirect consequence or lack of , at least in potential with different experimental models and methods, can be used as well—behavioral economics' potential uses are broad, but its reliability needs scrutiny.

Underestimation of the role of novelty as a stressor is the primary shortcoming of current approaches for market research. It is necessary to account for the biologically determined diphasisms of human behavior in everyday low-stress conditions and in response to stressors.

Critics of behavioral economics typically stress the rationality of economic agents. Others note that cognitive theories, such as prospect theory , are models of decision-making , not generalized economic behavior, and are only applicable to the sort of once-off decision problems presented to experiment participants or survey respondents.

A notable concern is that despite a great deal of rhetoric, no consistent behavioral theory has yet been espoused. Behavioral economists have proposed no unified theory. Until that happens, behavioral economics is a collection of observations. David Gal has argued that many of these issues stem from behavioral economics being too concerned with understanding how behavior deviates from standard economic models rather than with understanding why people behave the way they do.

Understanding why behavior occurs is necessary for the creation of generalizable knowledge, the goal of science. He has referred to behavioral economics as a "triumph of marketing" and particularly cited the example of loss aversion.

Traditional economists are skeptical of the experimental and survey-based techniques that behavioral economics uses extensively. Economists typically stress revealed preferences over stated preferences from surveys in the determination of economic value.

Experiments and surveys are at risk of systemic biases , strategic behavior and lack of incentive compatibility. Matthew Rabin [34] dismisses these criticisms, countering that consistent results typically are obtained in multiple situations and geographies and can produce good theoretical insight. Behavioral economists, however, responded to these criticisms by focusing on field studies rather than lab experiments. Some economists see a fundamental schism between experimental economics and behavioral economics, but prominent behavioral and experimental economists tend to share techniques and approaches in answering common questions.

For example, behavioral economists are investigating neuroeconomics , which is entirely experimental and has not been verified in the field. The epistemological, ontological, and methodological components of behavioral economics are increasingly debated, in particular by historians of economics and economic methodologists.

According to some researchers, [31] when studying the mechanisms that form the basis of decision-making, especially financial decision-making, it is necessary to recognize that most decisions are made under stress [36] because, "Stress is the nonspecific body response to any demands presented to it.

Nudge is a concept in behavioral science , political theory and economics which proposes positive reinforcement and indirect suggestions as ways to influence the behavior and decision making of groups or individuals.

Nudging contrasts with other ways to achieve compliance, such as education , legislation or enforcement. The concept has influenced British and American politicians. The first formulation of the term and associated principles was developed in cybernetics by James Wilk before and described by Brunel University academic D. Stewart as "the art of the nudge" sometimes referred to as micronudges [38].

It also drew on methodological influences from clinical psychotherapy tracing back to Gregory Bateson , including contributions from Milton Erickson , Watzlawick , Weakland and Fisch, and Bill O'Hanlon.

It also gained a following among US and UK politicians, in the private sector and in public health. A nudge, as we will use the term, is any aspect of the choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge.

Banning junk food does not. In this form, drawing on behavioral economics, the nudge is more generally applied to influence behaviour.

One of the most frequently cited examples of a nudge is the etching of the image of a housefly into the men's room urinals at Amsterdam's Schiphol Airport, which is intended to "improve the aim". Nudging techniques aim to use judgmental heuristics to our advantage. In other words, a nudge alters the environment so that when heuristic, or System 1, decision-making is used, the resulting choice will be the most positive or desired outcome.

In , the United States appointed Sunstein, who helped develop the theory, as administrator of the Office of Information and Regulatory Affairs. Notable applications of nudge theory include the formation of the British Behavioural Insights Team in Both Prime Minister David Cameron and President Barack Obama sought to employ nudge theory to advance domestic policy goals during their terms.

Nudge theory has also been applied to business management and corporate culture , such as in relation to health, safety and environment HSE and human resources. Regarding its application to HSE, one of the primary goals of nudge is to achieve a "zero accident culture". Leading Silicon Valley companies are forerunners in applying nudge theory in a corporate setting. These companies are using nudges in various forms to increase the productivity and happiness of employees.

Recently, further companies are gaining interest in using what is called "nudge management" to improve the productivity of their white-collar workers.

Behavioral economics

Behavioral insights and nudges are currently used in many countries around the world. Nudging has also been criticised. Tammy Boyce, from public health foundation The King's Fund , has said: Cass Sunstein has responded to critiques at length in his The Ethics of Influence [53] making the case in favor of nudging against charges that nudges diminish autonomy, [54] threaten dignity, violate liberties, or reduce welfare.

Ethicists have debated this rigorously. Similarly, legal scholars have discussed the role of nudges and the law. Behavioral economists such as Bob Sugden have pointed out that the underlying normative benchmark of nudging is still homo economicus , despite the proponents' claim to the contrary. It has been remarked that nudging is also a euphemism for psychological manipulation as practiced in social engineering.

There exists an anticipation and, simultaneously, implicit criticism of the nudge theory in works of Hungarian social psychologists who emphasize the active participation in the nudge of its target Ferenc Merei , [66] Laszlo Garai [12]. The central issue in behavioral finance is explaining why market participants make irrational systematic errors contrary to assumption of rational market participants.

The study of behavioral finance also investigates how other participants take advantage arbitrage of such errors and market inefficiencies. Behavioral finance highlights inefficiencies, such as under- or over-reactions to information, as causes of market trends and, in extreme cases, of bubbles and crashes.

Such reactions have been attributed to limited investor attention, overconfidence, overoptimism, mimicry herding instinct and noise trading. Technical analysts consider behavioral finance to be behavioral economics' "academic cousin" and the theoretical basis for technical analysis. Other key observations include the asymmetry between decisions to acquire or keep resources, known as the "bird in the bush" paradox, and loss aversion , the unwillingness to let go of a valued possession. Loss aversion appears to manifest itself in investor behavior as a reluctance to sell shares or other equity if doing so would result in a nominal loss.

Benartzi and Thaler, applying a version of prospect theory , claim to have solved the equity premium puzzle , something conventional finance models so far have been unable to do. Quantitative behavioral finance uses mathematical and statistical methodology to understand behavioral biases. In marketing research, a study shows little evidence that escalating biases impact marketing decisions. Some financial models used in money management and asset valuation incorporate behavioral finance parameters.

Critics such as Eugene Fama typically support the efficient-market hypothesis. They contend that behavioral finance is more a collection of anomalies than a true branch of finance and that these anomalies are either quickly priced out of the market or explained by appealing to market microstructure arguments. However, individual cognitive biases are distinct from social biases; the former can be averaged out by the market, while the other can create positive feedback loops that drive the market further and further from a " fair price " equilibrium.

Similarly, for an anomaly to violate market efficiency, an investor must be able to trade against it and earn abnormal profits; this is not the case for many anomalies. A specific example of this criticism appears in some explanations of the equity premium puzzle. It is argued that the cause is entry barriers both practical and psychological and that returns between stocks and bonds should equalize as electronic resources open up the stock market to more traders.

Behavioral game theory, invented by Colin Camerer , analyzes interactive strategic decisions and behavior using the methods of game theory , [76] experimental economics , and experimental psychology. Experiments include testing deviations from typical simplifications of economic theory such as the independence axiom [77] and neglect of altruism , [78] fairness , [79] and framing effects.

A handful of comparative psychologists have attempted to demonstrate quasi-economic reasoning in non-human animals. Early attempts along these lines focus on the behavior of rats and pigeons. These studies draw on the tenets of comparative psychology , where the main goal is to discover analogs to human behavior in experimentally -tractable non-human animals. They are also methodologically similar to the work of Ferster and Skinner.

Recent studies have adopted a slightly different approach, taking a more evolutionary perspective, comparing economic behavior of humans to a species of non-human primate , the capuchin monkey. Many early studies of non-human economic reasoning were performed on rats and pigeons in an operant conditioning chamber. These studies looked at things like peck rate in the case of the pigeon and bar-pressing rate in the case of the rat given certain conditions of reward.

Space considerations do not permit a detailed discussion of the reasons why economists should take seriously the investigation of economic theories using nonhuman subjects Use of this laboratory is predicated on the fact that behavior, as well as structure, vary continuously across species, and that principles of economic behavior would be unique among behavioral principles if they did not apply, with some variation, of course, to the behavior of nonhumans.

The typical laboratory environment to study labor supply in pigeons is set up as follows. Pigeons are first deprived of food. Since the animals become hungry, food becomes highly desired. The pigeons are then placed in an operant conditioning chamber and through orienting and exploring the environment of the chamber they discover that by pecking a small disk located on one side of the chamber, food is delivered to them.

In effect, pecking behavior becomes reinforced , as it is associated with food. Before long, the pigeon pecks at the disk or stimulus regularly. In this circumstance, the pigeon is said to "work" for the food by pecking. The food, then, is thought of as the currency. The value of the currency can be adjusted in several ways, including the amount of food delivered, the rate of food delivery and the type of food delivered some foods are more desirable than others.

Researchers argue that this is similar to labor supply behavior in humans. That is, like humans who, even in need, will only work so much for a given wage , the pigeons demonstrate decreases in pecking work when the reward value is reduced. In human economics, a typical demand curve has negative slope. This means that as the price of a certain good increase, the amount that consumers are willing and able to purchase decreases.

Researchers studying the demand curves of non-human animals, such as rats, also find downward slopes. Researchers have studied demand in rats in a manner distinct from studying labor supply in pigeons.

Specifically, in an operant conditioning chamber containing rats as experimental subjects, we require them to press a bar, instead of pecking a small disk, to receive a reward.

The reward can be food reward pellets , water, or a commodity drink such as cherry cola. Unlike in previous pigeon studies, where the work analog was pecking and the monetary analog was a reward, the work analog in this experiment is bar-pressing.

Under these circumstances, the researchers claim that changing the number of bar presses required to obtain a commodity item is analogous to changing the price of a commodity item in human economics. In effect, results of demand studies in non-human animals show that, as the bar-pressing requirement cost increase, the number of times an animal presses the bar equal to or greater than the bar-pressing requirement payment decreases.

An evolutionary psychology perspective states that many of the perceived limitations in rational choice can be explained as being rational in the context of maximizing biological fitness in the ancestral environment, but not necessarily in the current one. Thus, when living at subsistence level where a reduction of resources may result in death, it may have been rational to place a greater value on preventing losses than on obtaining gains.

It may also explain behavioral differences between groups, such as males being less risk-averse than females since males have more variable reproductive success than females. While unsuccessful risk-seeking may limit reproductive success for both sexes, males may potentially increase their reproductive success from successful risk-seeking much more than females can. Much of the decisions are more and more made either by human beings with the assistance of artificial intelligent machines or wholly made by these machines.

Tshilidzi Marwala and Evan Hurwitz in their book, [98] studied the utility of behavioral economics in such situations and concluded that these intelligent machines reduce the impact of bounded rational decision making. In particular, they observed that these intelligent machines reduce the degree of information asymmetry in the market, improve decision making and thus making markets more rational.

The use of AI machines in the market in applications such as online trading and decision making has changed major economic theories. Experimental economics is the application of experimental methods , including statistical , econometric , and computational , [99] to study economic questions.

Data collected in experiments are used to estimate effect size , test the validity of economic theories, and illuminate market mechanisms.

Economic experiments usually use cash to motivate subjects, in order to mimic real-world incentives. Experiments are used to help understand how and why markets and other exchange systems function as they do. Experimental economics have also expanded to understand institutions and the law experimental law and economics.

A fundamental aspect of the subject is design of experiments. Experiments may be conducted in the field or in laboratory settings, whether of individual or group behavior. Variants of the subject outside such formal confines include natural and quasi-natural experiments.

Behavioral pdf an introduction to economics

Neuroeconomics is an interdisciplinary field that seeks to explain human decision making , the ability to process multiple alternatives and to follow a course of action. It studies how economic behavior can shape our understanding of the brain , and how neuroscientific discoveries can constrain and guide models of economics.

Introduction economics pdf to behavioral an

It combines research methods from neuroscience , experimental and behavioral economics, and cognitive and social psychology. Neuroeconomics studies decision making by using a combination of tools from these fields so as to avoid the shortcomings that arise from a single-perspective approach. In mainstream economics , expected utility EU and the concept of rational agents are still being used. Many economic behaviors are not fully explained by these models, such as heuristics and framing.

Behavioral economics emerged to account for these anomalies by integrating social, cognitive, and emotional factors in understanding economic decisions.

Neuroeconomics adds another layer by using neuroscientific methods in understanding the interplay between economic behavior and neural mechanisms. By using tools from various fields, some scholars claim that neuroeconomics offers a more integrative way of understanding decision making. From Wikipedia, the free encyclopedia. Part of a series on Economics Index Outline Category.

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