1. Bounded Rationality And Heuristics

Question 1

Why did many economists not think it was necessary to examine actual economic behaviour?

Answer 1

They thought errors due to bounded rationality would be extinguished by markets or evolution

Question 2

Give the assumptions in the traditional standard economic model of human behaviour

Answer 2

-fully rational
-selfish, own utility maximiser
-can compute optimal solution
-has unbounded willpower

Question 3

What are the assumptions of bounded rationality?

Answer 3

-cognitive limitations
-not purely selfish (have other regarding or social preferences)
-might not maximise but satisfice
-inconsistent time and risk preferences
-might have limited willpower

Question 4

Examples of bounds to selfishness

Answer 4

-contributing to charities
-volunteering
-contributing to public goods
-replicating behaviour

Question 5

What are heuristics

Answer 5

In general heuristics are helpful ways of simplifying decisions but they can lead to systematic errors or biases

Question 6

Who coined the two models of thinking?

Answer 6

Stanovich & West 2000

Question 7

What is system 1

Answer 7

Quick, effortless, emotional, associative, difficult to control

Question 8

What is system 2

Answer 8

Conscious reasoning, slow, effortful, used for complex demanding tasks

Question 9

What is the availability bias?

Answer 9

It is where people assess the frequency of a class or the probability of an event by the ease with which instances or occurrences can be brought to mind

Question 10

What is representativeness bias?

Answer 10

The probability that an object A belongs to class B is evaluated by the degree to which A is representative of B (or by the degree to which A resembles B)

Question 11

What is the misconception of chance?

Answer 11

Chance is commonly viewed as a self correcting process in which a deviation in one direction induces a deviation in the opposite direction to restore equilibrium. In fact, deviations are not “corrected” as a chance process unfolds, they are merely diluted (Tversky & Kanheman 1974)

Question 12

What is Gamblers fallacy and give an example

Answer 12

Another example of neglecting base rates in favour of negative serial correlation. Clotfelter & Cook 1993 found lower betting on previous winning lottery numbers

Question 13

What is hot hand phenomenon and give an example

Answer 13

It is another example of neglecting base rates in favour of positive serial correlation. Guryon & Kearney 2008 found after a large prize winning ticket the lucky stores ticket sales increased

Question 14

How do Mullainathan & Thaler 2001 argue that bounded rational agents aren’t exstinguished from the market?

Answer 14

They say “because of the limits of arbitrage, less than perfect agents survive and influence market outcomes”. The market provides incentives but doesn’t force anyone to do anything

Question 15

Who was the earliest critic of modelling economic agents as having unlimited information processing capabilities?

Answer 15

Herbert Simon 1955

Question 16

Give an example of overprecision in the literature

Answer 16

Zickfield Et al 2010 found scientists intervals on global warming temperature changes to not overlap

Question 17

What is the illusion of control?

Answer 17

People think they have more control over circumstances than they actually do (Thompson 1999)

Question 18

When do people most often exhibit overconfidence?

Answer 18

When overestimating their performance on subjective measures which are hard to prove correct or incorrect (eg 93% of US drivers consider themselves more skilful and less risky than the median driver, Svenson 1981)

Question 19

Give an example of anchoring and adjustment

Answer 19

People give lower answers for 1x2x3…x8 than for 8x7x6…x1 (Tversky & Kahneman 1974)

Question 20

How do people evaluate conjunctive and disjunctive events?

Answer 20

People tend to overestimate the probability of conjunctive events and underestimate the probability of disjunctive events (T&K 1974). Think of marble experiment

Question 21

What is a consequence of misconception of regression to the mean?

Answer 21

People over estimate the impact of intervention. For example speed cameras installed after a road incurs an exceptionally high number of crashes

Question 22

What is the conjunction fallacy?

Answer 22

The probability of a conjunct event can’t exceed any of its constituent events yet people often get this wrong

Question 23

Give an example of the conjunction fallacy

Answer 23

People think there are more 7 letter words ending “ing” than 7 letter words with “n” as the 6th letter

Question 24

What are the biases associated with representativeness?

Answer 24

Insensitivity to base rates
Insensitivity to sample size
Misconception of chance
Regression to the mean
Conjunction fallacy

Question 25

What is the confirmation trap?

Answer 25

Tendency for people to seek evidence that would confirm a hypothesis and ignore negative evidence

Question 26

Give an example of the confirmation trap

Answer 26

Wason selective task 1966, 1968 Four cards EK47. Which of the cards do you need to turn to obtain conclusive evidence of the following rule: a card with a vowel on it will have an even number on the other side. Most people say E and 4 instead of E and 7

Question 27

What are the two explanations for anchoring effects?

Answer 27

Insufficient adjustments from anchor Priming (compatible associations)

Question 28

What is the conjunctive event bias?

Answer 28

Conjunctive events are events that must occur together with one another. Typically people estimate the probability of conjunctive events.

Question 29

What is the disjunctive event bias?

Answer 29

Disjunctive events are events that cause the system to fail if at least one bad event occurs. Typically people underestimate the probability of disjunctive events

Question 30

What are the biases associated with the confirmation heuristic?

Answer 30

Confirmation trap Anchoring and adjustment Conjunctive and disjunctive event bias Overconfidence Hindsight bias Curse of knowledge

Question 31

What is the curse of knowledge?

Answer 31

It is difficult to imagine others know less than you

Question 32

How might leaders gain support?

Answer 32

Leaders realise that to gain support they must express more confidence than their rivals (Radzevick & Moore 2011)

Question 33

What studies or readings relate to heuristics and biases?

Answer 33

-Tversky & Kahneman 1974 -Mullainathan & Thaler 2001 -Bazerman & Moore 2013