W7 - Behavioural Law and Economics Flashcards
(7 cards)
What is the analogy between neoclassical to behavioural economics and Newtonian to quantum mechanics?
Newtonian describes most of the world successfully, as does neoclassical economics. When you look at subatomic particles (how people actually make choices) this falls apart and quantum mechanics, behavioural economics steps in to explain.
What is the uncertainty principle and the main effect. Give the baseball card example. What implications does this have for lab experiments?
The observer effect - When you observe something, the behaviour changes
In a controlled environment like a lab, people know they are being observed and so they confirm what they think experimenters want to see or behave according to social norms.
Example
Baseball card dealers. In a lab, prioritised fairness over profit due to being observed. In the field, non local dealers chose profit while local ones (reputation effect) gave higher quality cards.
Questions whether lab experiments could ever be valid.
What is the correspondence principle. Does it always apply? Give a large market scale, time scale and no effect example.
On an aggregate scale, quantum mechanics (neoclassical economics) is a good approximation even though it might be dodgy on a small scale. This applies for both a market scale (baseball card example) and a time scale (bonus example, if I gave a large cash bonus productivity initially increases so behavioural economics but after a while so a long time scale behaviour reverts back to the same productivity level so neoclassical)
(The contrast effect). Judges that are used to dealing with serious crimes give 25% shorter sentences than a judge that usually hears moderate crime. Shows neoclassical model doesn’t always work even at large scales as behavioural biases do not always dissapear.
What is the quantum principle and relate it to economics. What is the certainty effect using the risk example and tie it to irl implications for policy implementation. How do firms exploit cognitive limitations?
Physical quantities like electrons change in discrete levels. This is the same as human cognition as our attention occurs in discrete levels, whereas neoclassical assumes it is continuous and smooth, able to divide our attention infinitely eg. when you have 500 toothpaste options our brains hit a limit (Tyranny of choice)
Certainty effect - when faced with a small and large risk, people prefer to completely remove the small risk than drastically reduce the large risk as it reduces number of things to think about. - This has irl implications for policy design as it means mandated disclosures ( like nutrition label) dont work or are counter productive since consumers cant pay attention to all of it.
Firms exploit cognitive limitation eg. setting high initial price then putting on sale to look like a better deal (Tesco Clubcard)
What is a nudge? What philosophy does it use? Give an irl example of retirement plans.
Nudges are when you make a small change to the environment or how you present a choice without removing options that change the behaviour of humans but NOT rational agents.
Philosophy of libertarian paternalism as preserves choice but tries to encourage people to make the choice that benefits them.
Example
Need to encourage myopic workers to save for retirement. Legislation that created automatic enrolment plans for retirement savings with a default firm contribution rate. Didn’t work as the behavioural economics was right, but the neoclassical was not as the firm itself was a rational profit maxxer and set a low contribution rate.
Who is the main author to cite in this lecture?
Hubbard
Are behavioural economics test well replicated in other studies?
No
