Notes Psychology and Economic Behavior
Lecture 1
Economic psychology science of economic mental life and behavior
The homo economicus rational individual who makes rational
decisions to maximize utility, capable of learning from experience, and
with stable, consistent preferences.
An example:
People give one cookie instead of half of the package. People aren’t homo
economicus. People aim to satisfice.
Economic psychology and behavioural economics
• Similarities:
- Same historical roots
- Theory-driven behavioral research
- Focus on insights to help individuals and society in the economic
domain
• Differences:
- EP focused on understanding human mental life (aspect of human
psychology)
- BE more interdisciplinary, but EP more diversity in research methods
- Research ethics: no deception in EP
- BE: libertarian paternalism, EP: maybe
Expected utility theory
- Maximizing utility: value/price follows an individual’s strive for
happiness/satisfaction maximization
- Principle of decreasing marginal utility
- Go for the option with highest expected value, but people do not
always maximise EV
- Subjective expected utility model: replace objective with subjective
probabilities
,Prospect theory most successful development of SEU
2 phases
1. Editing phase outcomes are assigned a subjective value by coding
them in relation to some reference point, and probabilities are
translated into decision weights.
2. Evaluation phase the prospect with the highest evaluation gets
chosen
Endowment effect a research participant who owns an item, such as a
coffee cup or a chocolate bar demands more money to part with the item
than another participant who has been randomly assigned to the role of
purchaser is willing to pay for it.
Loss aversion the reaction to losses is stronger than the reaction to
gains.
Status quo bias the tendency to prefer a current state to a change.
Fourfold pattern of risk attitude
Conclusion prospect theory:
1. Risk averse over gains
2. Risk seeking over losses
3. Overweigh small probabilities and overweight large probabilities
, Emotions and decision-making
- Influences both ways
- Bodily signals, that we experience as emotions, guide decision-
making when the outcomes of decisions are uncertain
Common difference effect adding an additional delay to both options in
a choice pair will increase choices of LL. Using our example, someone who
chooses $100 today over $110 in one year might nonetheless choose
$110 in two years over $100 in one year: the one-year delay matters more
if it starts now than if it starts in one year.
Lecture 1
Economic psychology science of economic mental life and behavior
The homo economicus rational individual who makes rational
decisions to maximize utility, capable of learning from experience, and
with stable, consistent preferences.
An example:
People give one cookie instead of half of the package. People aren’t homo
economicus. People aim to satisfice.
Economic psychology and behavioural economics
• Similarities:
- Same historical roots
- Theory-driven behavioral research
- Focus on insights to help individuals and society in the economic
domain
• Differences:
- EP focused on understanding human mental life (aspect of human
psychology)
- BE more interdisciplinary, but EP more diversity in research methods
- Research ethics: no deception in EP
- BE: libertarian paternalism, EP: maybe
Expected utility theory
- Maximizing utility: value/price follows an individual’s strive for
happiness/satisfaction maximization
- Principle of decreasing marginal utility
- Go for the option with highest expected value, but people do not
always maximise EV
- Subjective expected utility model: replace objective with subjective
probabilities
,Prospect theory most successful development of SEU
2 phases
1. Editing phase outcomes are assigned a subjective value by coding
them in relation to some reference point, and probabilities are
translated into decision weights.
2. Evaluation phase the prospect with the highest evaluation gets
chosen
Endowment effect a research participant who owns an item, such as a
coffee cup or a chocolate bar demands more money to part with the item
than another participant who has been randomly assigned to the role of
purchaser is willing to pay for it.
Loss aversion the reaction to losses is stronger than the reaction to
gains.
Status quo bias the tendency to prefer a current state to a change.
Fourfold pattern of risk attitude
Conclusion prospect theory:
1. Risk averse over gains
2. Risk seeking over losses
3. Overweigh small probabilities and overweight large probabilities
, Emotions and decision-making
- Influences both ways
- Bodily signals, that we experience as emotions, guide decision-
making when the outcomes of decisions are uncertain
Common difference effect adding an additional delay to both options in
a choice pair will increase choices of LL. Using our example, someone who
chooses $100 today over $110 in one year might nonetheless choose
$110 in two years over $100 in one year: the one-year delay matters more
if it starts now than if it starts in one year.
