Lecture 1
Normative theory of behavior: Expected utility model > Defines how decisions should be
made and a theory of how people make decisions that people follow, and a description of how
econs make choices.
- Rationality doesn't matter
How people should behave
Descriptive theory of behavior: Prospect theory > hypothetical value model
- Objective losses/gains: degree of satisfaction based on the gain or loss
- Subjective losses/gains: 4 axioms
How people actually behave
4 punten
- People are loss aversive (losses loom larger than gains) (losing > curve more steeper)
- Risk propensity if determined by how options are framed (depending on how questions
are framed we are gravitated to a certain decision)
- People evaluate the consequences in terms of deviation from a reference point
(comparing apple laptop you already have to a new one) individuals status quo
- People experience diminished sensitivity to losses and gains (je bent blijer met 10 euro
als je niks hebt dan wanneer je 100 euro krijgt als je 8000 euro hebt)
Prospect theory
A Lose / gain: lose/gain 900 for sure
B Lose / gain: 90% chance to lose/gain 1000
, Gain: more A, lose: more B
Deze hebben dezelfde utility als je het uitrekent 90% van 1000
→ verschil tussen winnen en verliezen -> Risk aversion in gain, risk seeking in loss
Prospect theory implications
- For example a sale: 25 instead of 50 → This influences the choice (reference
dependencies)
- Should I take this course or not
--
Framing effect: contains 10% fat vs 90% fat free
Loss aversion: a sale (when I don't buy this I lose)
Labor: motivation = payment → effort is dependent on money (or intrinsic motivation)
Tutorial: Three important society relevant problems
Lecture 2: heuristics by decision making
System 1: impulsive system → heuristic based = happens to you, no control - default
system
- Fast intuitive
- Unconscious and automatic
- Everyday decisions
- Error prone
Advantages
- Quick responses
- Comfortable with the familiar
- Association making
- Easy completion of routine
Disadvantages
- Jumps to conclusions
- Unhelpful emotional responses
- Makes mistakes unconsciously
System 2: Analytical thought → reasoning
- Slower
- Conscious and effortful
- Complex / first time decision
- Reliable
Advantages
Normative theory of behavior: Expected utility model > Defines how decisions should be
made and a theory of how people make decisions that people follow, and a description of how
econs make choices.
- Rationality doesn't matter
How people should behave
Descriptive theory of behavior: Prospect theory > hypothetical value model
- Objective losses/gains: degree of satisfaction based on the gain or loss
- Subjective losses/gains: 4 axioms
How people actually behave
4 punten
- People are loss aversive (losses loom larger than gains) (losing > curve more steeper)
- Risk propensity if determined by how options are framed (depending on how questions
are framed we are gravitated to a certain decision)
- People evaluate the consequences in terms of deviation from a reference point
(comparing apple laptop you already have to a new one) individuals status quo
- People experience diminished sensitivity to losses and gains (je bent blijer met 10 euro
als je niks hebt dan wanneer je 100 euro krijgt als je 8000 euro hebt)
Prospect theory
A Lose / gain: lose/gain 900 for sure
B Lose / gain: 90% chance to lose/gain 1000
, Gain: more A, lose: more B
Deze hebben dezelfde utility als je het uitrekent 90% van 1000
→ verschil tussen winnen en verliezen -> Risk aversion in gain, risk seeking in loss
Prospect theory implications
- For example a sale: 25 instead of 50 → This influences the choice (reference
dependencies)
- Should I take this course or not
--
Framing effect: contains 10% fat vs 90% fat free
Loss aversion: a sale (when I don't buy this I lose)
Labor: motivation = payment → effort is dependent on money (or intrinsic motivation)
Tutorial: Three important society relevant problems
Lecture 2: heuristics by decision making
System 1: impulsive system → heuristic based = happens to you, no control - default
system
- Fast intuitive
- Unconscious and automatic
- Everyday decisions
- Error prone
Advantages
- Quick responses
- Comfortable with the familiar
- Association making
- Easy completion of routine
Disadvantages
- Jumps to conclusions
- Unhelpful emotional responses
- Makes mistakes unconsciously
System 2: Analytical thought → reasoning
- Slower
- Conscious and effortful
- Complex / first time decision
- Reliable
Advantages
