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  1. “Do you agree with the reunification of Austria with the German Reich that was enacted on 13 March 1938 and do you vote for the party of our leader; Adolf Hitler?; Yes; No”

  2. Last time… • Major themes • Power of the situation • Predictable irrationality • More on this in coming weeks…

  3. The approach we will take • Exploring theory • What are psychological mechanisms of social and non-social behavior? • How do these compare to assumptions about behavior? • How applicable in policy contexts • Policy design • Policy implementation • Leadership and management issues

  4. A simple, yet profound fact Decisions stem not from the objective states of the world, but the individual mental representations created of those states! This is NOT to claim that all behavior is erratic and unpredictable…

  5. Introduction to Behavioral Economics 10.6.2010

  6. What is Behavioral Economics? • Blend of multiple fields • Economics • Cognitive Psychology • Social Psychology • Judgment and decision making • Behavioral decision research

  7. What is Behavioral Economics? • Typical assumptions of traditional economics not accurate • Rational • Self-interested • Consistent • Difference between “normative” and “descriptive” theories of behavior

  8. What is Behavioral Economics? A key observation of BE: Individuals are “irrational” but often extremely predictable!

  9. Understanding human behavior • Rational agent model (normative) • Well-informed • Stable preferences • Controlled and calculating • Behavioral model (descriptive) • Mediocre judgment • Malleable preferences • Impulsive *but, behavior is often predictable!!

  10. Mental Accounting • How individual keep track of financial activity • Set of cognitive operations • Focus on three components • Perception/experience of outcomes • Assignment of monetary activity to “accounts” • Frequency of choice evaluation and bracketing • Violations of fungibility

  11. Framing of gains and losses • Direct relation to prospect theory • Ways to frame outcomes • Minimal account • Topical account • Comprehensive account

  12. Decision Frames and MA Imagine that you go to buy a jacket that you have wanted for awhile. The jacket costs $60 [$10], but the clerk informs you that a store twenty minutes away sells the same jacket for $5 less. Would you go to the other store to buy the jacket?

  13. Framing of gains and losses • Direct relation to prospect theory (next week) • Ways to frame outcomes • Minimal account • Topical account • Comprehensive account • Jacket example shows topical accounting

  14. MA Decision making • Transaction utility • Beer on the beach example • Advance purchases, sunk costs • Blizzard example • Show example

  15. Budgeting/Bracketing • Consumption categories • Differences in class • Violations of fungibility! • Diversification heuristic • Candy choices/retirement funds (1/n heuristic)

  16. Is mental accounting normative? • What ought people do? • Benefits of MA: • Economizing time • Economizing mental resources • What are drawbacks?