Behavioral Economics 2nd Edition Edward Cartwright - Solutions

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, what would happen if Maria’s reference point was to do her homework on Saturday, and what if it was to do it on Monday?How is this related to the concept of personal equilibrium we looked at in the last chapter?
Looking back at Table
I showed that δ speed up > δ delay in the case of a receipt. Show thatδ speed up < δ delay in the case of a payment?
In section
Explain the difference between time-consistent and present biased preferences.Why is this distinction not important in a model of exponential discounting?
Inter-temporal utility (as defi ned in equation 4.1) is about measuring streams of utility over time. To make life easier for themselves, however, economists normally think about streams of money over time. This should be ok if we think in terms of, say, ‘$10’s worth of utility’, but could be
Is expected utility theory of any practical revelance?
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and γ = 0.61, a person would pay $110 for an extra deductible of $500 if the claim rate was 4 percent. How much would a person be willing to pay to reduce the deductible by $165 if the claim rate is 25 percent? Comment on the numbers in Table
that, applying the standard formulation of prospect theory with λ = 2.25, β =
I argued in section
What would happen to the equity premium if investors were less loss averse or the evaluation period was longer? How often should you evaluate your investments?
One set of prospects considered by Loomes et al. (1991) was the following, A = (0, $10; 0.6, $4), B = (0.7, $7.50; 0.3, $1) and C = (1, $5). What would you choose between A and B, B and C, and A and C? How can regret theory help us explain choices in this case?
What do you think is the relevant reference point of a prospect? How might the certainty effect be related to reference dependence?
In 1963 Paul Samuelson wrote about a colleague who said that he would turn down the prospect (0.5, – $100; 0.5, $200) but would accept 100 such prospects. Suppose that his utility function is u ( x ) = x − w if x ≥ w and u ( x ) = −2.5( w − x ) if w > x where w is his wealth. Show why he
.
Using prospect theory say whether a person would prefer prospect I or prospects J to N from Table
consider the following three prospects, A = (0.5, $2,400; 0.5, $0), B = (0.7, $2,400; 0.3; $0) and C = (0.3, $2,400; 0.7; $0). Work out the utility of each prospect and comment on the result.
Using the model of disappointment with θ =
.
Show why it is inconsistent with expected utility that most people choose prospect F over E and prospect G over H, when the prospects are as in Table
Explain why the indifference curves in a probability triangle diagram are straight lines if preferences satisfy expected utility theory. [Hint, we can write the expected utility of a prospect as U ( x ) = p 1 u ( x 1 ) + (1 − p 2 − p 3 ) u ( x 2 )+ p 3 u ( x 3 ).]
Suppose that Anna owns her own house and house prices go up. Should she spend more? Now, suppose she has money invested in the stock market and share prices go down. Should she spend less?
Using search, contrast effects and reference dependence suggest why a person who lives in an area where apartments cost around $200,000 may be reluctant to buy when she moves to an area where apartments cost around$300,000.
Does the fact a taxi driver works nine hours a day mean he has a reference level of hours he wants to work? [Hint: it could be that his utility function just becomes steep at nine hours. A reference level of hours worked should be determined by some exogenous factor such as how many hours his
Suppose someone’s willingness to pay for a good is $10 and there reference point is $20. If the good is $13 will they buy it? What does this tell us about sales and ‘bargain buys’?
Why would we expect EG to be greater than WTA?
Argue that, if true, the ‘no loss in buying’ hypothesis means the WTP valuation is more reliable than the WTA valuation
List all the heuristics that have appeared in the chapter?
Why is time important in reference dependent utility? Compare how happy Carol and Amanda will feel the day they get the report from their broker, the next day, after a month etc.
Is it possible Anna could be infl uenced by both trade-off contrast and extremeness aversion simultaneously?
Why might a company wanting to advertise a product be interested in the trade-off contrast hypothesis and extremeness aversion?
If you wanted to fi nd a new mobile phone, outfi t, car, house, job, how would you search for one?
What are the objectives of studying the standard economic model?
What are the objectives of behavioral economics?
Is it good that experiments usually involve students as subjects?
Why does is make sense to mix up experimental treatments and sessions, i.e.to have multiple treatments in each session and multiple sessions for each treatment?
Why does a heuristic usually come hand in hand with a cognitive bias? Should we emphasize how clever people are for having good heuristics, or how dumb they are for being biased?
Why do we need to run economic experiments?
Why is the standard economic model a good thing, and why is it a bad thing, in trying to understand economic behavior?
Come up with some nudges of your own.
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 firm 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 fishing for national, inshore fishing than international, offshore fishing?
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 firms 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–inflation 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?
Why 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 financial 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 fixed 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 brain’s reward systems react to expected value or‘expected utility’?
Why does the brain interpret money as a reward? Is it a primary or a secondary reinforcer?
Why should development economics take account of cultural differences?
Why does it not make evolutionary sense for a young person to support an older parent? Why could it happen because of cultural influence?
Why do many people save money all their life in order to bequeath to their children?
How can confirmatory 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 find 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 first 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 0.4.
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 fine 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 firm where you earn $50,000 and the average salary is $80,000 or in a firm 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-efficient 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 find the level of punishment such that, after she has paid for punishing, Anna will have exactly the social reference point. For the
Should we equate material payoff with money?
In section 7.1.5 I mentioned a study by Andreoni and Miller (2002).They asked subjects to play 11 different dictator games. 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 the
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 weakest 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?
Given what we see in Figures 6.13 and 6.14, which auction format do you think will raise the most revenue?
What do you think are the consequences of the law of small numbers and confirmatory bias for learning in games?
How can we change the models of reinforcement learning and belief-based learning to take account of loss aversion?

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Behavioral Economics 2nd Edition Edward Cartwright - Solutions

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