Lecture unit 1 Flashcards
(39 cards)
Economic view of preferences?
Each individual has stable and coherent preferences
- each is assumed to rationally maximise the expected value of utility
What is the idea behind reference levels?
- Humans are more sensitive to changes than to absolute levels,
- affecting the utility of product/service that may also depend on a reference level (determined by factors such as past consumption or expectations of future consumption
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Loss Aversion Theory by Kahneman and Tversky
- People are more averse to losses than attracted to same-sized gains,
- leading to risk aversion and value function changes at the reference level.
What is risk aversion?
displeasure from monetary loss is greater than the pleasure from a same-sized gain
What is the Endowment effect?
- The tendency to overvalue something we own, regardless of its objective market value
- explained by loss aversion.
–>greater value when owned, especially true for symbolic, experiential or emotional significance
What is the status quo biases?
- A preference for the current state or status quo to changes
- changes involving losses are avoided even if compensated by gains
–>arises from the concept of loss averision
What is simple alturism perspective?
- People value the well-being of others, affecting behavior and welfare with concern for others
- give surplus to the person who is poorer/who values the goods more
- maximal benefits criterion
–>People put positive value on the well-being of others
What is behavioral distributive justice?
Examines how people divide resources, incorporating self-interest sacrifice for fairness principles.
Behaviroral distributive justice:
What are the two perspective?
- Simple altruism perspective: maximal benefits criterion: give the surplus to ther person who is poorer/who values the goods more
- Alternative norms: 50/50 splitting of resources, maximin criterion
Maximal benefits vs. Maximin Allocation
Choice between
- maximizing total welfare gains or
- equalizing welfare gains in resource distribution.
What are the characteristics of everyday economic fairness judgments?
- Are more complicated
- Reference levels are crucial
- People’s general perceptions of fair behavior may adjust over time
- People seem to implicitly (but pervasively) consider equitable sharing (fair distribution) over changes in total endowments, not total endowments (total amount of each person) themselves
What influences social preferences over other people’s consumption? And what is Altruism directed to whom?
Social Preferences Influences:
- Social preferences are affected by the behavior, motivations, and intentions of others.
- Altruism is directed towards those perceived as deserving, while there’s often indifference towards those deemed undeserving
What is Reciprocal Altruism ? context example: conserving water
Reciprocal Altruism:
- Actions, like conserving water during a drought, are driven by a desire to contribute to the general good
- This illustrates reciprocal altruism where actions benefit all, including oneself indirectly.
What is reciproral alturism vs. simple altruism? (Conservation of water example)) What happens in both, when you hear that other do not preserve water?
Simple Altruism vs. Reciprocal Altruism:
In simple altruism,
- learning that others do not conserve might lead one to increase their conservation efforts,
- contrary to reciprocal altruism and against common intuition and evidence.
- This highlights a nuanced view of altruism based on perceived collective effort and individual responses to it
Reciprocal Altruism
— conservation contributes to the general good
— social benefits of conservation diminish
— based on mutual benefit, you conserve water, you might expect others to do the same
How does the role of volition affect perceptions of generosity?
(What do people differentiate between generosity acts)
Role of Volition in Reciprocity:
- People distinguish between acts of generosity that are chosen freely and those compelled by circumstances
What shapes our interpretation of someone’s motives?
(How do beliefs about consequences influence reciprocity?)
The interpretation of someone’s motives is shaped
- by our beliefs about their understanding of the consequences of their actions
- Recognizing intentional generosity influences reciprocity.
How do beliefs about economic context influence reciprocity? (Wages firms, employees)
- Firms may offer higher wages as a gesture of generosity, hoping employees will reciprocate with greater effort.
- Employees are likely to respond positively to what they perceive as voluntary generosity from employers, enhancing their effort as a form of reciprocity
What are cognitive biases in judgment? (definition)
are systematic patterns of deviation from norm and/or rationality in judgment.
Which biases make people departure from perfect rationality?
- Anchoring and adjustment bias
- Representativeness Heuristic
- Availability Heuristic
- The Law of Small Numbers
- Belief Perseverance and Confirmatory Bias
What is anchoring and adjustment bias?
- Consumers perceive new information through an essentially warped lens
- Undue emphasis on statistically arbitrary, psychologically determined anchor points
What is representative heuristic?
- Over reliance on perceptions of stereotypical groups
- Things/ events are assumed to be correlated more closely than they actually are.
What is availability heuristic?
- Over reliance on readily available information
- Misjudgment of risks
- Assessment based on false assumptions
What is the law of small numbers?
People exaggerate how closely a small sample will resemble the parent population from which the sample is drawn
The law of small number: What is the gambler´s fallacy?
- If a fair coin has not come up tails for a while, then on the next flip it is “due” for a tails
- People over-infer the probability distribution from short sequences
