Chapter 8 - Behavioral economics. This chapter will define behavioral economics and explain how it contrasts with neoclassical economics. It will relate how prospect theory helps explain many consumer behaviors; and how time inconsistency and myopia cause people to make suboptimal long-run decisions. It will also define fairness and give examples of how it affects behavior in the economy. | Chapter 8 Behavioral Economics Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. This chapter will define behavioral economics and explain how it contrasts with neoclassical economics. It will relate how prospect theory helps explain many consumer behaviors; and how time inconsistency and myopia cause people to make suboptimal long-run decisions. It will also define fairness and give examples of how it affects behavior in the economy. Comparing Behavioral Economics with Neoclassical Economics Neoclassical Economics 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 LO1 Rationality is the most fundamental point of disagreement between behavioral economics and neoclassical economics. Neoclassical economics . | Chapter 8 Behavioral Economics Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. This chapter will define behavioral economics and explain how it contrasts with neoclassical economics. It will relate how prospect theory helps explain many consumer behaviors; and how time inconsistency and myopia cause people to make suboptimal long-run decisions. It will also define fairness and give examples of how it affects behavior in the economy. Comparing Behavioral Economics with Neoclassical Economics Neoclassical Economics 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 LO1 Rationality is the most fundamental point of disagreement between behavioral economics and neoclassical economics. Neoclassical economics makes a number of highly unrealistic assumptions about human capabilities and motivations. Behavioral Economics Focusing on the mental process behind decisions Improving outcomes by improving decision-making Comparing Behavioral Economics with Neoclassical Economics LO1 Behavioral economics puts significant emphasis on the mental process driving behavior. Improving outcomes by improving decisions is one of the distinguishing characteristics of behavioral economics. Our Efficient, Error-prone Brains Heuristics are energy savers Riding a bicycle with steering heuristics Guesstimating ranks with the recognition heuristics The implications of hardwired heuristics LO2 The brain evolved many low-energy mental shortcuts, called heuristics. These shortcuts are not the most accurate mental-processing options but used because the opportunity cost of perfection is high. Brain Modularity System 1 and System 2 Cognitive Biases Confirmation Bias Overconfidence Effect Availability Heuristic
