Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A
EC 320 Exam 1 Questions with Answers
Decision Theories
Ans: "or theories of choice" are an effort to study how individuals will pursue goods
How do we view goals and preferences?
Ans: We take them as given
Economics is an amoral science
Descriptive Theories
Ans: how people in fact make decisions
Normative Theories
Ans: how people should make decisions
What happens if people fail to act as they should?
Ans: A theory cannot be both descriptively accurate and normatively correct
Standard Economic Theory
Ans: A theory of rational choice- how people who are and act rational make decisions
Neoclassical Economics
Ans: Generally considers rational choice theory to be both descriptively accurate and
normatively correct
Deviations from rational choice theory are considered:
Ans: small, unsystematic, and unpredictable
those that consistently act irrational (whether business or consumer) are stripped of wealth
until they have no market impact
Behavioral Economics
Q&A
, Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A
Ans: Increase the predictive power of economics theory by recognizing what the best
available psychological evidence has to say about how people in fact make decisions.
Believe that a single theory cannot be both descriptively and normatively correct
Behavioral vs Neoclassical
Ans: 1. Both are study of decision-making in an environment of scarce resources
2. Both concern themselves with how decisions affect the market and public policy
3. Behavioral Economists reject neoclassical idea that people are not predictably and
systematically irrational (people do not always behave as they should)
Origins of Behavioral Economics
Ans: - Behavioral Econ is one of the newest recognized fields in economics
-Notable: Daniel Kahneman Nobel Peace Prize in 2002
-Dates back to Adam Smith and David Ricardo's theories of trade on mercantilism. &
Keynes's idea of "animal spirits" guiding decisions
Early Economic Theory was built on a foundation of hedonic psychology:
Ans: 1. Individuals seek to max pleasure and min pain
2. Influenced by Betham, Mill, and Utilitarianism
3. Justified assumption by assuming people were introspective- an individual knows what he
or she wants and why
How did WWII trend in sciences affect Behavioral Econ?
Ans: Post WWII trend in all sciences to study what can be observed and externally verified. -
Behavioralism (psychology), Verificationism (philosophy), Operationalism (physics)
-Economics moved towards observable, preference-based approach to avoid the fuxiness
of psychology
-Early economics that incorporated mathematics ignored preferences and psychology
entirely and focused on the choices of goods only. Preference-based approach allowed
the return of the idea of maximizing utility functions
-The goal was to remove an fuzzinesss about what goes on "in the head" and focus on
observable traits like preferenceszz
Cognitive Revolution (1950s and 1960s)
Q&A
, Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A
Ans: Renewed focus on study of things "in the head" including beliefs, desires, rules of
thumbs, etc.
-Behavioral Econ was born out of an interest in how what goes on "in the head" influences
how we in fact make decisions
Methods
Ans: 1. Hypothetical Choices- relied on participant responses; decision had no weight on it
2. Laboratory experiments
-demand for more scientific rigor
-problems: 1) often times participants were undergrad students 2) usually made real choices
involving real money or goods (usually very small amount); however, preferred over
hypothetical scenarios
3. Field experiments
-observe everyday behavior of individuals (typically) unaware that they are participating in a
study
-control environment to randomly place individuals into treatment and control groups
4. Neuroeconomics
-using fMRI scanners and other tools from neuroscience to observe how the brain reacts to
decision-making
"under certainty"
Ans: a decision-maker is aware of what the outcome of any choice will be
Rational Choice is an ____________
Ans: Axiomatic Theory
-contains rules; "true by definition"-build a complete theory of behavior based on a. few
simple (and improvable) assumptions, called axioms
Concept of preferences is fundamental to _____________
Ans: both neoclassical economics and behavioral economics
Relations
Q&A
EC 320 Exam 1 Questions with Answers
Decision Theories
Ans: "or theories of choice" are an effort to study how individuals will pursue goods
How do we view goals and preferences?
Ans: We take them as given
Economics is an amoral science
Descriptive Theories
Ans: how people in fact make decisions
Normative Theories
Ans: how people should make decisions
What happens if people fail to act as they should?
Ans: A theory cannot be both descriptively accurate and normatively correct
Standard Economic Theory
Ans: A theory of rational choice- how people who are and act rational make decisions
Neoclassical Economics
Ans: Generally considers rational choice theory to be both descriptively accurate and
normatively correct
Deviations from rational choice theory are considered:
Ans: small, unsystematic, and unpredictable
those that consistently act irrational (whether business or consumer) are stripped of wealth
until they have no market impact
Behavioral Economics
Q&A
, Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A
Ans: Increase the predictive power of economics theory by recognizing what the best
available psychological evidence has to say about how people in fact make decisions.
Believe that a single theory cannot be both descriptively and normatively correct
Behavioral vs Neoclassical
Ans: 1. Both are study of decision-making in an environment of scarce resources
2. Both concern themselves with how decisions affect the market and public policy
3. Behavioral Economists reject neoclassical idea that people are not predictably and
systematically irrational (people do not always behave as they should)
Origins of Behavioral Economics
Ans: - Behavioral Econ is one of the newest recognized fields in economics
-Notable: Daniel Kahneman Nobel Peace Prize in 2002
-Dates back to Adam Smith and David Ricardo's theories of trade on mercantilism. &
Keynes's idea of "animal spirits" guiding decisions
Early Economic Theory was built on a foundation of hedonic psychology:
Ans: 1. Individuals seek to max pleasure and min pain
2. Influenced by Betham, Mill, and Utilitarianism
3. Justified assumption by assuming people were introspective- an individual knows what he
or she wants and why
How did WWII trend in sciences affect Behavioral Econ?
Ans: Post WWII trend in all sciences to study what can be observed and externally verified. -
Behavioralism (psychology), Verificationism (philosophy), Operationalism (physics)
-Economics moved towards observable, preference-based approach to avoid the fuxiness
of psychology
-Early economics that incorporated mathematics ignored preferences and psychology
entirely and focused on the choices of goods only. Preference-based approach allowed
the return of the idea of maximizing utility functions
-The goal was to remove an fuzzinesss about what goes on "in the head" and focus on
observable traits like preferenceszz
Cognitive Revolution (1950s and 1960s)
Q&A
, Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A
Ans: Renewed focus on study of things "in the head" including beliefs, desires, rules of
thumbs, etc.
-Behavioral Econ was born out of an interest in how what goes on "in the head" influences
how we in fact make decisions
Methods
Ans: 1. Hypothetical Choices- relied on participant responses; decision had no weight on it
2. Laboratory experiments
-demand for more scientific rigor
-problems: 1) often times participants were undergrad students 2) usually made real choices
involving real money or goods (usually very small amount); however, preferred over
hypothetical scenarios
3. Field experiments
-observe everyday behavior of individuals (typically) unaware that they are participating in a
study
-control environment to randomly place individuals into treatment and control groups
4. Neuroeconomics
-using fMRI scanners and other tools from neuroscience to observe how the brain reacts to
decision-making
"under certainty"
Ans: a decision-maker is aware of what the outcome of any choice will be
Rational Choice is an ____________
Ans: Axiomatic Theory
-contains rules; "true by definition"-build a complete theory of behavior based on a. few
simple (and improvable) assumptions, called axioms
Concept of preferences is fundamental to _____________
Ans: both neoclassical economics and behavioral economics
Relations
Q&A
