Behavioral Economics 3rd Edition Edward Cartwright - Solutions

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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?
Look back at Table 6.9. What would happen if ρ = 0 or ρ = 1?
Look back at Table 6.8. 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?
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?
Come up with a list of reasons why a person’s opinion of electoral candidates may be biased. On what basis should the person decide whom to vote for?
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 confirmatory 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 overinfluenced by what others do in some situations, and underinfluenced in others?
There are no experiments to test for confirmatory 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?
Compare the three approaches, looked at above, for deriving an intergenerational discount factor. Why is it so difficult to agree on the best approach?
How can people overestimating how much they will use the gym and underestimating how much they will use the telephone both be caused by time inconsistency?
What strategy can firms use to take account of other cognitive biases and heuristics that we have looked at, like loss aversion and risk aversion?
Is there a difference between firms exploiting a customer’s bias and changing their strategy to take account of a customer’s bias?
Why do many firms, 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 make it more likely that 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.
Looking back at Table 4.10, 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 that we looked at in the last chapter?
In section 4.3, I showed that δspeed-up > δdelay in the case of a receipt.Show that δspeed-up < δdelay in the case of a payment.
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 defined 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
In many court cases there is no clear-cut defense and prosecution(e.g. divorce disputes). What does the fourfold pattern of risk attitudes predict in such cases?
Carefully explain why the overweighting of low probabilities can lead to tax evasion and frivolous litigation.
Why may a person’s decision to evade taxes be influenced by what his friends and colleagues are doing?
Is expected utility theory of any practical revelance?
I argued in section 3.7 that, applying the standard formulation of prospect theory, with λ = 2.25, β = 0.88, 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
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, $3), 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 ≥ wand u(x) = −2.5(w − x) if w > x where w is his wealth.Show why he turned down
Using prospect theory, say whether a person would prefer prospect I or prospects J to N from Table 3.6.
Using the model of disappointment with θ = 0.002, 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.
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 3.5.
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) = p1u(x1) + (1− p2 − p3) u(x2) + p3u(x3).]
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 that 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
Write down a list of occasions where you could have gained from lying or deception. Why can context influence whether or not you lie?
Suppose someone’s willingness to pay for a good is $10 and their 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 that Anna could be influenced 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 find a new mobile phone, outfit, 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 it 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?
Can nudge be useful in avoiding the confirmatory bias and the law of small numbers?
Come up with some nudges of your own.
Should governments ask citizens whether they agree with behavior change, or just get on with it?
Would Homo economicus be influenced at all by nudges?
What are the advantages and disadvantages of employers being automatically enrolled in a default savings plan?
Is there any difference between a nudge that works at a conscious level and one that works at a 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 United States? 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, such as a threshold public good game.
The European 4G auctions raised a lot less money than the 3G auctions, particularly in the United Kingdom. Does that mean the auctions were designed badly?
Should the objective of a government running a spectrum auction be to raise as much money as possible?
Carefully explain the difference between a stable and unstable matching algorithm.
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, a threshold public good game and a 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 adaptation, or the lack of adaptation, to unemployment when calculating the unemployment– inflation trade- off? What effect would this have?
Explain why projection bias is different from present bias. How does this show up in people’s decisions to save for retirement?
Given adaptation 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?
Discuss the different ways in which pre- commitment can help a person increase their utility.
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?
Consider the distinction between consumption goods, such as a car or fridge, and experience goods, such as a restaurant meal or holiday. For which type of good are the differences between decision utility, total utility and remembered utility likely to be largest?
Discuss why current mood can influence the choice a person makes about some event that will not happen until some distant point in the future.
If happiness is strongly related to relative income then how should a government think about maximizing total happiness?
Why do you think a high national output does not translate into 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?
Can we trust measures of happiness and life satisfaction?
Explain why peak– end evaluation causes duration neglect.
Does neuroeconomics go against the methodology of positive economics (see section 1.1.4)?
Consider and categorize the different brain processes that might happen for someone who is the proposer in an ultimatum game.
What can we learn from neuroeconomics about the effect framing has on choice?
Is a multiple- self model helpful in modeling economic behavior?

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Behavioral Economics 3rd Edition Edward Cartwright - Solutions

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