Neoclassical vs Behavioural and the Building Blocks

Question 1

Rational economic theory

Answer 1

argues that human rationality doesn’t matter, for the purpose of economic theory, because it isn’t systematic. So is treated as a self-cancelling noise

BE argue that many of the departures from rational choice theory that have been observed are indeed systematic and that the error tend to be in the same direction

argues that we are predictably irrational

Question 2

Neoclassical vs behavioural

Answer 2

Neoclassical uses archival data to run regression analysis and creates models which can describe what has been observed

assumptions underlying the model can be oversimplified

BE focuses on actual behaviour and experiences

experimental economics uses experiments by isolating key variables

behavioural economics argues we arent completely rational

Question 3

Keynes’ “animal spirit”

Answer 3

our spontaneous urge to act recognising that actions are often driven by emotions rather than rational and calculated thoughts

fell out of favour in the 1970s as economy dominated by mathematical sophistication- suffered from “physics envy” - desire to align with exact sciences rather than social sciences

Question 4

System 1 - Kahneman

Answer 4

intuitive, instinct, quick

completing the phrase knife and…
answering 2x2

skills are involuntary and wired into our DNA
share with animals

this thinking can be “an efficient and powerful way of achieving our goals” - Halsworth & Kirkman

Question 5

System 2

Answer 5

deliberate, effortful, lazy, unemotional, logic, self-aware, slow

parking in a narrow spare
big sums
filling in a tax return

how neoclassicals see our thought processes

need to focus attention, difficult to multitask

Question 6

Depletion of system 2

Answer 6

becomes tired, depleted when it’s being used too much and as such its ability to engage in self control can be diminished

people who are cognitively busy are more likely to use sexist language and behave badly

Question 7

Experiment on depleting system 2

Answer 7

actors given either a difficult or easy cognitive task and whilst doing so were asked if they wanted fruit or doughnuts

those trying to remember a more complicated number gave in to doughnuts

Question 8

judges and system 2 depletion

Answer 8

statistically only 35% cases result in parole in Israel - default is parole to be denied as its the easier decision

• most depleted just before meal (0% granted parole)
• 65% granted just after lunch

Question 9

The lazy system 2

Answer 9

those who allow their system 1 thinking to override their system 2 are more susceptible to lack of self control issues

take marshmallow test - 600 children aged 4-6

marshmallow put in front, told would get another if they waited 15 mins

• only 1/3 haired
• one child licked the entire table

Question 10

Cognitive ease/strain

Answer 10

when things are easy, there are no threats, no difficulties, you are in a good mood - system 1

when problems arise, strain indicates the need to mobilise system 2

“cognitive strain, whatever its source, mobilises system 2, which is more likely to reject the intuitive answer suggested by system 1” - TF&S