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An alternative model. Previous discussion shows that the assumption that consumers choose rationally is not always true.So, now what?Throw it out the door?But, the standard theory sometimes does make accurate predictionsBehavioral economics suggests a modification that can make standard economi
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1. What does the subject matter of this presentation have to do with economics? How can people protect themselves from the weaknesses discussed here? How can or should rational actors and policy makers make use of the ideas discussed here?What does the subject matter of this presentation have to do with economics? How can people protect themselves from the weaknesses discussed here? How can or should rational actors and policy makers make use of the ideas discussed here?
2. An alternative model Previous discussion shows that the assumption that consumers choose rationally is not always true.
So, now what?
Throw it out the door?
But, the standard theory sometimes does make accurate predictions
Behavioral economics suggests a modification that can make standard economics more accurate
3. “Our theory proposes that many sorts of decision problems should be viewed as a game between a sequence of short-run impulsive selves and a long-run patient self.”
4. Fudenberg & Levine (2006) Long-run (patient) self
This side tries to maximize utility across time
5. Choice One Pick one
You can receive $1.00 (cash) on the second to last day of this class.
You can receive $1.05 (cash) on the last day of this class. Use clickers. Write down percentages for discussion.Use clickers. Write down percentages for discussion.
6. Choice Two Pick one. One week prior to the last day of class, you can have during class either
Tangerine
Chocolate Bar
The dollar value of both is identical. (Of course, the tangerine is a healthier choice.)
Use clickers. Write down percentages for discussion.Use clickers. Write down percentages for discussion.
7. Choice Three Pick one
You can receive $1.00 (cash) right now.
You can receive $1.05 (cash) during the next meeting of this class.
Use clickers. Write down percentages for discussion.Use clickers. Write down percentages for discussion.
8. Choice Four Pick one. Right now, you can have either
Tangerine
Chocolate Bar
The dollar value of both is identical. (Of course, the tangerine is a healthier choice.)
Use clickers. Write down percentages for discussion.Use clickers. Write down percentages for discussion.
9. Research Results D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.D. Read (Leeds U.) & B. van Leeuwen (Leeds U.), 1998, Predicting hunger: The effects of appetite and delay on choice. Organizational behavior and human decision processes, 76, 189-205.
10. Dual-self Long-run (patient) self
This side tries to maximize utility across time
11. Discussion
12. Discussion
13. Hyperbolic discounting Would you rather receive $100 right now or $101 in a week? Most people choose $100 right now.
But when the choice is between $100 a year from now and $101 in a year and a week from now, most people choose $101 in a year and a week.
This is time inconsistent, as both choices involve delaying by one week for $1. See Laibson, David, “Golden Eggs and Hyperbolic Discounting, Quarterly Journal of
Economics, 112 (1997), 443–477.
Robson, A. J. (2002). Evolution and human nature. The Journal of Economic Perspectives, 16(2), 89-106. See Laibson, David, “Golden Eggs and Hyperbolic Discounting, Quarterly Journal of
Economics, 112 (1997), 443–477.
Robson, A. J. (2002). Evolution and human nature. The Journal of Economic Perspectives, 16(2), 89-106.
14. Discussion
15. Thoughts to ponder Could the willingness of some to ignore a 52% interest rate for immediate reward have implications for consumer use of credit?
Could the variations in the healthiness of food choices have implications for consumer food choices?
More later… This presentation introduces dynamic inconsistency and some implied metaphors about our thought processes that are not particularly helpful.This presentation introduces dynamic inconsistency and some implied metaphors about our thought processes that are not particularly helpful.
16. How we deal with our dual selves
17. A fundamental economic law If people rationally maximize utility
Then, with full information, more choices are always better (or at least no worse)
If new options are not better than current options, I simply won’t choose them
18. Costly choice removal Will people pay to remove an option?
19. Costly choice removal Do people checking into a drug rehab program know that the drug will not be available?
20. Costly choice removal Do people attending a weight loss camp know that their favorite foods will not be available?
21. Costly choice removal Will people fighting alcoholism buy Antabuse (disulfiram), a drug that causes alcohol to be nauseating?
22. Costly choice removal Do people ever choose to drive the longer way home in order to avoid being tempted?
23. Costly choice removal
24. Costly choice removal contradicts simple rational utility maximization
25. “The false assumption is that people always make choices that are in their best interest. This claim is either tautological, and therefore uninteresting, or testable. We claim that it is testable and false—indeed, obviously false.”
26. I hope you are convinced We do not always make rational choices.
The widespread presence of costly choice removal is a specific example indicating that people are aware of the conflicts within us
