Behavioral Economics 1st Edition Edward Cartwright - Solutions

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In order to explain the performance of the economy through the business cycle and the formulation of the appropriate monetary policy, would you rely on either the classical paradigm or the Keynesian one, or sometimes on one and sometimes on the other?Explain your answer with reference to the
What are the underlying themes of the Keynesian paradigm? Do they justify the study of just one model, one variety of models, or several different varieties of models? Why?
“The modern classical approach does not assume full employment. In fact, it allows for the deviations of employment from its full-employment level.” Discuss these statements.If you agree with them, what is the nature of such deviations? Compare their nature with the nature of deviations from
Explain Say’s law and provide its justification. Discuss its validity for a monetary economy that has commodities, money, and bonds.
Explain the various models within the classical approach and compare them. Which would you accept for your economy?
What are the underlying themes (or theme, if only one) of the classical paradigm? How are they represented in the different models within this paradigm?
What are the reasons for the existence of financial intermediaries? Why do the ultimate lenders usually not lend directly to the ultimate borrowers?
Why do we observe a wide variety of checking and savings accounts, rather than just one of each type?
Can banks create money? How and under what conditions? How do banks differ from other financial intermediaries and why do central banks regulate more closely the operations of banks?
What are the different ways of defining money in your economy? Compare these with the monetary aggregates commonly used in another selected country. Explain their differences and the reasons for such differentiation.
Should governments ask citizens whether they agree with behavior change, or just get on with it?
Is there any difference between a nudge that works at a conscious or subconscious level?
How could a charity or private fi rm exploit the save more tomorrow idea?
Why might people need a nudge in deciding what insurance to buy, or health care provider to use in the US? Where else might nudges make sense?
Why is it useful to distinguish between policies about institutions and about individual behavior? You might want to contrast saving choices with interactive situations like a threshold public good game.
Should the objective of a government running a spectrum auction be to raise as much money as possible?
Do you think subjects should be allowed to communicate with each other during experiments?
Why is it easier to achieve sustainable fi shing for national, inshore fi shing than international, offshore fi shing?
What is the difference between a weak link game, threshold public good game, and common pool resource game?
Should Europe change policy, and not require fi rms to include the sales tax when advertising price?
Should we take account of adaption, or the lack of adaption to unemployment, when calculating the unemployment infl ation trade-off? What effect would this have?
Explain why projection bias is different to present bias. How does this show up in people’s decisions to save for retirement?
Given adaption and projection bias, are patients informed enough to decide what medical treatments are best for them?
How can we take account of adaption when calculating QALYs?
Suppose you are taking a course in behavioral economics that involves doing three assignments. Would you rather that the course organizer gives staggered deadlines for handing in the work, or that you merely need to hand in the work before the end of the course? Why?
Why do you think a high national output does not translate to higher levels of life satisfaction? What are the implications of this for how we measure economic performance?
If a person has done something before, should we expect that remembered utility equals decision utility?
Should a person choose the thing that maximizes decision utility, total utility or remembered utility?
Explain why peak-end evaluation causes duration neglect.
Is a multiple-self model helpful in modeling economic behavior?
Is addiction different to habit?
What policy should the government adopt to stop people doing drugs or smoking?
Why might it be consistent with forward-looking behavior that people want to quit smoking? What if I tell you that only 26 percent of people said they wanted to quit smoking because of fi nancial reasons (ONS 2004), but 86 percent said they wanted to quit because of health reasons?
Given that brain activation is constrained to fall within a fi xed range, how can activation be in proportion to the reward? What does this suggest about our differing ability to distinguish relative from absolute magnitudes?
Relate reward prediction error to reference dependence.
Why is reward prediction error relevant in interpreting Figures 9.4 to 9.7?
When does Rob feel the value of winning at roulette: when the wheel stops, when he collects his money, or when he eats the chips he buys with the money? Relate this to hedonic editing.
Do you think the brains reward systems react to expected value or ‘expected utility’?
Why does the brain interpret money as a reward? Is it a primary or secondary reinforcer?
Why does it not make evolutionary sense for a young person to support an older parent? Why could it happen because of cultural infl uence?
Why do many people save money all their life in order to bequeath to their children?
How can confi rmatory bias help explain the gender gap?
What do you think is the main cause of the gender gap?
Does maximizing utility mean maximizing happiness?
Why is it so hard to get cooperation to emerge in the haystack model?
Is natural selection relevant in understanding modern economic behavior or is it only culture that matters?
Design an experiment to fi nd out whether people dislike aggregate risk compared to idiosyncratic risk.
Is present bias and time inconsistency a good evolutionary strategy?
How can evolution explain reference dependence? How about loss aversion?
Let’s go back to the fi rst example of long and short winters. Suppose there are 1,600 adults of type L, 1,600 of type S, and 1,600 randomizer types. The randomizer types decide at the start of each summer whether to gather enough food for a long winter, and do gather enough with probability
Give some examples of intermediate goods that may enter the utility function.Is money an intermediate good?
What can we learn from the ultimatum game about the interaction between a buyer and seller of a good?
Should employers fi ne poorly performing workers, or give bonuses to well performing workers in order to provide the most effective incentives?
Why can loss aversion help explain why a cut in wages is worse than a rise in wages is good? How is this related to wage stickiness and habit formation?
Is it better to be in a fi rm where you earn $50,000 and the average salary is $80,000 or in a fi rm where you earn $45,000 and the average salary is$30,000?
In the intentions based model of section 7.3.1 the equitable payoff was derived looking only at Pareto effi cient outcomes. Why is this sensible?
How can an intentions based model of fairness be adapted to take account of earned versus unearned payoff, and social norms?
Why can punishment work in a linear public good game according to the Fehr-Schmidt model if only one person is willing to punish, but in the ERC model only if two people are willing to punish?
Find the general conditions such that punishment can work in a linear public good game in the ERC model and the Fehr-Schmidt model. Hint: for the ERC model fi nd the level of punishment such that after she has paid for punishing Anna will have exactly the social reference point. For the
Should with equate material payoff with money?
In section 7.1.5 I mentioned a study by Andreoni and Miller (2002). They asked subjects to play eleven different dictators game. In each game the proposer was given a number of tokens, from 40 to 100 and asked to divide the tokens between them and a receiver. Each token was worth $0.10 to$0.40 to
Why might payoffs be lower in a public good game with punishment even if punishment increases contributions? Is it good to have the threat of punishment or not?
What is the Nash equilibrium in a dictator game? What about the trust game and ultimatum game? Be careful to distinguish sub-game perfect Nash equilibria from other Nash equilibria.
How can leadership help people coordinate in the weak link game and threshold public good game? You might want to think about forward induction.
Why do you think it matters if there is the possibility of a refund or rebate when contributing to a threshold public good?
, which auction format do you think will raise the most revenue?
and
Given what we see in Figures
What do you think are the consequences of the law of small numbers and confi rmatory bias for learning in games?
How can we change the models of reinforcement learning and belief based learning to take account of loss aversion?
I said that it does not always make sense to set the probability of choosing a strategy proportional to its attractiveness. Can you explain why?
. What would happen if ρ = 0 or ρ = 1?
Look back at Table
. I assumed an initial attractiveness of 30 for both strategies. What happens if the initial attractiveness of both is 10 or is 100?What has this got to do with initial beliefs?
Look back at Table
Does risk dominance or Pareto dominance seem more relevant to you in predicting what people will do? What about forward or backward induction?
Does it make any difference if people can communicate with each other before playing a game?
Suppose you are playing the p-beauty contest with a group of people who have only just been told about the game. Is what you have learnt in this chapter any help to you? What about in the simple beauty contest?
When is the best time to sell an asset as a function of what other investors will do?
How does the buy sell imbalance relate to the ostrich effect?
What do you think happens if some traders have experience of bubble and crash but some do not?
Why do we see bubbles and crashes in the housing market?
When should someone buy an asset that is rising in price? When should they sell it?
How can we address the problems caused by biases in the interpretation of new information in health care, and more generally?
Consider reasons why confi rmatory bias and the law of small numbers may matter in health care.
Can we trust people’s opinions? Why might people trust friends over expert advice?
Why might people be over-infl uenced by what others do in some situations, and under-infl uenced in others?
There are no experiments to test for confi rmatory bias in economic behavior.Design one. And then do one to test for the law of small numbers.
Why might someone who is ambiguity averse delay making a decision?How does this relate to procrastination because of a present bias?
Ellsberg (1961) suggested another box in which there are 90 balls. You know that 30 of the balls are red and the other 60 are some mix of black and yellow. One ball will be randomly drawn from the box. Would you prefer to‘bet the ball is red’ or ‘bet the ball is black’? Would you prefer to
Why might people dislike compound lotteries or uncertainty?
How can people over-estimating how much they will use the gym and under-estimating how much they will use the telephone both be caused by time inconsistency?
What strategy can fi rm’s use to take account of other cognitive biases and heuristics we have looked at like loss aversion and risk aversion?
Is there a difference between fi rm’s exploiting a customer’s bias, and changing their strategy to take account of a customer’s bias?
Why do many fi rms, like gyms, charge a two-part tariff with a zero user fee?
What is the relationship between a model of habit formation and reference dependent utility?
What are the implications of habit formation for the life cycle hypothesis?
What context effects do you think makes it more likely someone will think of a series of events as a sequence rather than separated?
What is the expression for D ( t ) with quasi-hyperbolic discounting?
Looking back over this chapter and the previous two, come up with examples of context effects.

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Behavioral Economics 1st Edition Edward Cartwright - Solutions

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