University College London (UCL) • Behavioural Economics

People have hyperbolic discounting function, present bias and thus utility will be different from the traditional model

When making decision, we are not fully rational because of limited human cognitive. For example, financial literacy prevents people from saving earlier and smooth consumption, ignoring the sales tax (which is not in the posted price) means changes in demand when sales tax changes is different from changes in demand when posted price changes

Despite the assumption of traditional economics model that agents are rational, behavioural economics found that people are actually subject to bounded rationality by using heuristics. This leads to bias that could affect utilities

This set of notes contain 9 main topics of behavioural economics. Definitions and empirical examples are organised in a logical way. Highly recommended for those who want to understand BE but have short of time.

More examples of social preferences

When evaluating utility, people also care about what they achieve compared to others. Koszegi's model of social preferences

Since people are boundedly rational, governments use nudge to influence human decision in health, education, saving, etc.

Prospect theory as an alternative model for Expected Utility Model. This Reference-dependent model is based on how outcome changes from a reference point and how people weigh the probability of that outcome

Utility derived from changes from a reference point (prospect theory). But what can be the reference point?

Empirical evidences of intertemporal choices (time-inconsistency, stationarity violation, etc.)