Chapter 7 Flashcards
(28 cards)
What is hedonic utility?
The principle proposing that the pursuit of pleasure and the avoidance of pain explain all human behavior
This concept suggests that all actions are motivated by a desire for pleasure and a need to avoid pain.
Define utility in the context of economics.
The value of an option for personal or common use, considered a cardinal measure of pleasure
It is measured in absolute numbers.
What is hedonistic calculus?
The computation of utility as the net balance of pleasure and pain
Economists viewed this as a universal law of human behavior.
Who criticized the hedonistic calculus approach?
William James
He argued that determinants of behavior cannot be reduced to a simple calculation.
What is ordinal utility?
Utility that is measured by ranking options
If person A prefers object A over B, object A has higher utility.
What distinguishes cardinal utility from ordinal utility?
Cardinal utility is based on rating options on a utility scale
A person gives a utility score for each option.
What does the theory of subjective expected utility (SEU) posit?
The costs and benefits of options are multiplied by the perceived likelihood they occur
The option with the best net balance of costs and benefits will be chosen.
What is an anomaly in the context of SEU theory?
Something that conflicts with SEU theory
Anomalies challenge the validity of the dominant theory.
What does prospect theory state about losses and gains?
Losses are more painful than gains are pleasurable
Gains and losses are evaluated from a reference point.
What is personal reference?
The comparison of one’s present welfare with welfare in the past
This influences decision-making and perception of current situations.
Define framing in decision-making.
The process of providing information in positive (gains) or negative (losses) terms
It affects how choices are perceived and made.
What is the money illusion?
The act of focusing on the nominal rather than the real value of money
For example, being happy about a salary increase without considering inflation.
What does the welfare function of income refer to?
Functions derived from the assignment of income levels to evaluations
Examples include excellent, good, sufficient, insufficient, and poor.
What is a preference shift?
A change of reference point based on personal history
For instance, wanting a new car shortly after acquiring one.
Define social reference.
The comparison of one’s personal welfare with the welfare of relevant others
This influences feelings of fairness and satisfaction.
What is fairness in economic behavior?
A concern about the distribution of welfare between people
People often exhibit fair behavior in charitable donations and ultimatum games.
What is loss aversion?
The motivation to prevent losses
Potential losses trigger the amygdala, which is involved in danger responses.
What is the disposition effect?
The tendency of investors to hold losing stocks too long and sell gaining stocks too early
This can be explained by prospect theory.
What is hedonic framing?
The tendency to increase value by integrating and segregating gains and losses
It can affect how people perceive the outcomes of financial decisions.
What is the endowment effect?
The tendency to demand a higher price to sell goods in possession than the price willing to be paid to buy those goods
This reflects how ownership influences perceived value.
Define status-quo bias.
The tendency to select the present or default option
It does not require ownership, similar to the endowment effect.
What is the sunk-costs effect?
The tendency to consider historical invested costs when making investment decisions
Sunk costs refer to costs already invested in a project.
What is time preference?
The preference for spending money now or delaying spending
It influences financial decision-making and investment behavior.
What is hyperbolic discounting?
A hyperbolic function fitting the time preferences of people with the present as the reference point
It describes how people value future rewards less than immediate ones.
