代写代考 ECOS3997 Behavioural Economics

ECOS3997 Behavioural Economics
Dr. Guy Mayraz Department of Economics
University of COS3997
Behavioural Economics

Introduction
Temptation
Incomplete preferences
Bounded rationality
Social Beliefs
1 Introduction
2 Temptation
4 Incomplete preferences
5 Bounded rationality

Behavioural Economics
Introduction
Introduction
Temptation
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
What these slides are about
• A brief tour of behavioural economics findings and theory
• This is a selective tour, focusing on topics that are particularly likely to be relevant to behavioural interventions
Introduction
Temptation
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
How is this relevant
1 Many (though not all) of the problems we seek to address through behavioural interventions are caused by behavioural biases
Introduction
Temptation
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
How is this relevant
1 Many (though not all) of the problems we seek to address through behavioural interventions are caused by behavioural biases
2 Behavioural interventions utilise behavioural biases to ‘nudge’ people towards better behaviour
Introduction
Temptation
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
Introduction
Temptation
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
Introduction Temptation
The Marshmallow Test
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
Introduction Temptation
The Marshmallow test
Link to video: http://youtu.be/Yo4WF3cSd9Q
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
Introduction Temptation
Original experiment
The experiment
• Four year olds in a Stanford kindergarten
• Offered a food reward (whatever they prefer), which was
either exposed or covered
How self control was measured
Length of time until bell is pressed (to be able to eat the reward)
• Original focus: techniques for self-control
• Later: correlation between childhood measures of self-control and later life outcomes
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
Introduction Temptation
Self control measured in the condition in which the reward is exposed is strongly correlated with later life outcomes:
• SAT verbal and (more so) quantitative
• Parental ratings of coping ability as adolescents
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Background to the Moffitt study
• Recent study by Moffitt et al. [4]
• 1037 children in Dunedin, NZ.
• Self control measured by self reports, observations by researchers, and reports by teachers and parents.

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
• Strong link with life outcomes: • Health
• Material success
• Being a single parent
• Getting involved in crime
• Results remain when controlling for IQ.

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Two systems
The most natural behavioural model uses two utility function • A long-run utility that is unaffected by temptation
• A short-run utility that is a function only of temptation Human and monkey metaphor

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Human and monkey (cont.)
• “Rational” humans = monkey + uniquely human bit • The monkey is still there

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Human and monkey (cont.)
• “Self-control” is the relative strength of the human vs. the monkey
• The monkey gets excited by a tempting item (dessert) or an aversive item (work)

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Dessert example
• Long-run utility (human) rejects the dessert, because it makes you too full and causes weight gain
• Short-run utility (monkey) is excited by the taste of the dessert but only when it’s there
• This results in time-inconsistent preferences:
• Ahead of time, the person (human + monkey) prefers not
to eat dessert
• When the dessert is served, the person (human + monkey) eats the dessert
Formal model
• Long-run utility: u(dessert) = −1
• Short-run utility: v(dessert) = 2
• Ahead of time: u(dessert) < 0 • Dessert served: u(dessert) + v(dessert) > 0

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Standard economic model
The standard economic model (exponential discounting) can model eating dessert (though this requires an absurdly low discount factor), but can never model time-inconsistent preferences
Formal model
• Eating dessert = 2
• Getting fat (later) = -3
• Eat dessert if discount factor = δ < 2/3, since then 2 − 3δ > 0
• But then, ahead of time also prefer dessert: 2δ − 3δ2 > 0

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
The β − δ model
• The β − δ model (hyperbolic discounting) is the best-known behavioural model of temptation
• It generalises the standard exponential discounting model
• Key idea: discount factor β that weighs equally all future
• It doesn’t really generate additional insights to the human+monkey model

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Strengthening self-control
• Self-control changes with age
• It is not like a muscle. There is no evidence that people can increase their self-control (strengthen the human or weaken the monkey)
What people can do
• What people can do is to create situations which require less self-control

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Commitment
The human commits in advance to a course of action, so by the time the monkey wakes up, there is nothing it can do
Odysseus and the sirens
• When Odysseus was tempted by the sirens, he was unable to steer the ship towards them
• Odysseus’ monkey was in control of Odysseus, but Odysseus was not in control of the ship

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Some examples
Example (Casino black lists)
• In several places in the world people put themselves on casino black lists, preventing themselves from gambling.
Example (Alcohol addiction)
• Some alcohol addicts take a drug which reacts to the presence of alcohol, and makes them sick if they drink
Example (Self-imposed deadlines)
• Some students choose self-imposed deadlines for assignments [2].
• Such students do better.

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
More examples
Example (Christmas clubs)
• Christmas clubs are a traditional form of illiquid low interest saving to ensure money is available for Christmas
Example (Philippines saving study)
• 28.4% choose a savings account with restricted access over one with open access in study in Philippines [3].
• They then save more (suggesting a benefit for commitment).
Example (Obesity)
• Some obese people undergo a stomach reduction (bariatric) surgery, which limits their capacity to eat

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Commitment and financial markets
Financial markets undermine commitment devices:
• Credit cards, zip and afterpay remove the control of
limited cash
• Remortgaging eliminates the value of owning property as a commitment saving device
• In some places people can now borrow against restricted access accounts (e.g. superannuation), which again limits their value as a commitment device.

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Softer commitment
It may be sufficient to create a cost for yielding to temptation
Social costs
• you publicly promise your friends you will write the report • this makes it more expensive to procrastinate on the report • the potential embarrassment may also affect the monkey
Helping people you hate
• you make a credible promise to donate to a political enemy if you yield to temptation
• this disgusts the monkey, who may reluctantly agree to work

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Reducing visibility
Something as simple as putting cookies in an opaque jar can have a big impact
• Out of sight—out of mind

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Changing order
The order of items in a menu can have a massive impact of choices:
• putting healthier choices first, dramatically increases consumption of healthy choices
• this works in written menus
• it also works visually in physical shops

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Erecting barriers
If people have to get up and walk over to get a cookie, they would eat fewer cookies than if they just need to reach out and grab a a cookie
Small barriers matter
General point: small barriers have a massive impact on choices • if you want people to do more of something, eliminate all
• if you want people to do less of something, erect barrier—even small ones can be surprisingly effective

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Temptations fluctuate
Because temptations fluctuate, it can be effective to let the monkey have what it wants, but with a bit of delay
• prepare to stop working, or to stop exercising—but in 5 or 10 minutes
Once 5 or 10 minutes pass, the monkey may be calmer, and will let you continue

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Sophistication
Self-awareness or sophistication is essential for people to use self-control techniques
• Without self-awareness, there would be no demand for commitment, or other methods of self-control

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Procrastination
Naivete is key to procrastination
Report example
Suppose you need to write a report at some point during the term
• The monkey doesn’t want to write it today—tomorrow is better
• The human gives up, believing that tomorrow the monkey would be calm
• Come tomorrow, the monkey again refuses to work
• In the end, the report is only written when it can no longer be postponed

Behavioural Economics
Introduction
Temptation
The Marshmallow Test
Moffitt et al. study Modelling will-power Commitment Reducing temptation Self-awareness
Incomplete preferences
Bounded rationality
Social Beliefs
Report example (cont.)
If the human had correctly predicted this, he would have put up more of a fight:
• insisting on writing the report now • creating artificial deadlines
• social commitments

Behavioural Economics
Introduction Temptation
Standard model Reality
Gains and losses Framing Certainty Bracketing
Incomplete preferences
Bounded rationality
Social Beliefs

Behavioural Economics
Introduction
Temptation
Standard model Reality
Gains and losses Framing Certainty Bracketing
Incomplete preferences
Bounded rationality
Social Beliefs
Standard model

Behavioural Economics
Introduction
Temptation
Standard model Reality
Gains and losses Framing Certainty Bracketing
Incomplete preferences
Bounded rationality
Social Beliefs
Expected utility
The standard model in economics is expected utility
• People have a concave utility function over consumption,
such as u(c) =
• They evaluate an uncertain prospect by the expected
c, or u(c) = logc. utility of their total consumption
Basic setup
• A person has wealth w and a chance p of winning x • Expected utility is given by
(1 − p)u(w) + pu(w + x)

Behavioural Economics
Introduction
Temptation
Standard model Reality
Gains and losses Framing Certainty Bracketing
Incomplete preferences
Bounded rationality
Social Beliefs
Risk aversion
Since the utility function is concave, decision makers are always risk averse
But since utility is defined over final wealth, decision makers are effectively risk neutral over amounts smaller than their wealth

Behavioural Economics
Introduction
Temptation
Standard model Reality
Gains and losses Framing Certainty Bracketing
Incomplete preferences
Bounded rationality
Social Beliefs
Effective risk neutrality
x has a wealth of He has a 50% chance of winning some amount of money
An expected utility maximiser with u(x) = $1,000,000
Amount 5000000 500000 50000 5000 500 50
Certainty equivalent 1974744.8714 237372.4357 24847.5383 2498.4414 249.9844 24.9998

Behavioural Economics
Introduction
Temptation
Standard model Reality

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