Behavioral Economics. Lernzusammenfassung

Abstract, 2014

41 Pages


1. Behavioral Decision Theory... 2
1.1 Expected Utility Theory ... 3
1.1.1 Axioms of Expected Utility Theory ... 3
1.2. Classical Anomalies ... 5
1.3 Value formation ... 6
1.3.1 Menu effects -> violates generally the invariance assumption (relevant marketing practice) ... 6
1.3.2 Status Quo and endowment effect: nur für greifbare Dinge ... 7
1.3.3 Preferences reversals ... 7
1.4 Probability judgment ... 8
1.4.1 Representativeness heuristic ... 8
1.4.2 Availability and anchoring heuristic: ... 9
1.4.3 Self-evaluation bias (egocentric bias) ... 9
1.5 Prospect Theory ... 10
1.5.1 General principles ... 10
1.5.2 Loss Aversion ... 11
1.5.3 Shape of the utility (value) function ... 12
1.5.4 Decision weighting ... 13
1.6 Mental Accounting ... 16
2. Intertemporal Choice and sustainable decisions ... 18
2.1 The Discounted utility model (DUM) ... 18
2.1.1 Assumptions and features of the Discounted utility model: ... 19
2.1.3 Some anomalies in the Discounted Utility Model (DUM) ... 21
2.2 Alternative intertemporal choice models ... 21
2.2.1 Time inconsistent preferences (bspw. Wecker auf 8e stellen, um 8e dann nicht aufstehen) ... 21
2.2.2 Hyperbolic discounting ... 21
3. Behavioral Game Theory ... 25
3.1 Nature of (Behavioral) Game Theory ... 25
3.2 Equilibrium concepts... 25
3.3 Bargaining ... 28
3.4 Iterated dominance games ... 28
3.5 Models of bounded rationality (limited cognitive capacity) ... 29
3.5.1 Level-k-Model ... 29
3.5.2 Cognitive Hierarchy Model ... 29
3.6 Signaling ... 31
3.7 Learning ... 32

4. Social preferences ... 33
4.1 Empirical evidence ... 33
4.2 Factors affecting social preferences ... 37
4.3 Modeling social preferences ... 39
4.4 Inequality aversion models ... 39
4.4.1 The inequality aversion model of Fehr & Schmidt, FS-Model ... 39
4.4.2 The ERC-Model of Bolton & Ockenfels ... 41
Zusammenfassung Behavorial Economics
1. Behavioral Decision Theory
x Standard
o Descriptive theory: how people make decisions
o Normative theory: how people should make decisions
x What makes a good theory:
o 1. Congruence with reality: Explain or fit observations and make testable predictions
that later prove to be correct. Models predictions should always be tested with new
data that were not used to estimate the model originally
o 2. Generality: Good theory applies to a wide selection of phenomena. Exp. Law of
diminishing returns
o 3. Tractability (Formbarkeit): Making testable predictions easily for different
o 4. Parsimony (Sparsamkeit): Occam´s razor: What can be done with fewer
assumptions, is done vain with more.
o 5. Precision: Ability to give exact numerical predictions about behavior (Exp. Nash
equilibrium has a high precision)
o 6. Psychological plausibility

1.1 Expected Utility Theory
Decision making under risk can be considered as a process of choosing between different
prospects (gambles, lotteries). A prospect consists of a number of possible outcomes (x
) allong
with their associated probabilities (p
q = (x
, p
; ...; x
, p
Example: Prospects
Prospect A: 50% chance to win 100, 50% chance to win nothing --> q = (100, 0,5; 0, 0,5)
Prospect B: Certainty of winning 45 --> r = (45)
1.1.1 Axioms of Expected Utility Theory
x Ordering Axiom: Preferences for lotteries are complete and transitive
x Continuity: This assumption guaranties that preferences can be represented by some
function that attaches a real value to every prospect
x Independence axiom: If two prospects are mixed with a third one, the preferences between
the prospects don´t change.
Example: q = (3000), r = (4000, 0.8) --> If q > r then q´ = (3000, 0,25), r = (4000, 0.2)
x Monotonicity (stochastic dominance)

Expected Utility Theory states that
x Three
o Invariance:
descriptive invariance: preferences should not depend on the description of
the options
procedure invariance: preferences should not depend on the method of
elicitation (Herausholen)
o Asset integration
o Risk aversion: a person is risk-averse if she prefers the certain prospect r = (x) to
any risky prospect with expected value x. In EUT, risk aversion is caused by the
concavity of the utility function

1.2. Classical Anomalies
x Allais-Paradox: The Allais-Paradox violates the independence axiom and is an example of
what is called consequence effect.
x Ellsberg-Paradox: 90 marbles in an urn, 30 red and 60 black and yellow, but in undefined
relation. The majority chooses (1a) and (2b). This choice violates the independence axiom,
because the number of yellow marbles is identical for a and b.
Interpretation: Individuals prefer risk over ambiguity (Doppeldeutigkeit).
but probabilities are known
Ambiguity: Outcomes are uncertain, and probabilities are not known

1.3 Value formation
x Attitude:
a psychological tendency that is expressed by evaluating. Objects of attitudes (entities) are
mental representations
o Preference:
In the standard economic model it is assumed that attitudes determine preferences
Value = utility:
Quantitative evaluation that results from attitude. Usually what economists
mean by the term utility
x Choice:
Involves an action and a decision. Choice is a revealed preference
1.3.1 Menu effects -> violates generally the invariance assumption (relevant marketing practice)
x Attraction effect (decoy effect):

x Choice avoidance (paradox of choice):Consumer compares the positive attributes of the
alternative chosen to the union of the positive attributes of all alternatives not chosen. The
opportunity costs that are considered increase in the options presented.
1.3.2 Status Quo and endowment effect: nur für greifbare Dinge
The valuation of a good should be independent of owning the good or not. This implies that the
maximum willingness to pay should be equal to the minimum willingness to ask. Empirical
evidence, especially in experiments, consistently rejects this assumption. It indicates that gains
(acquiring (=erwerben) a good) are evaluated differently from losses (giving up a good).
1.3.3 Preferences reversals
In a binary choice, attention is drawn to the gain probability. In valuation elicitation (WTA) attention
is drawn to the gain amount

1.4 Probability judgment
Concerning the point of beliefs, two assumptions are central to the standard economic model:
x Perfect rationality:
Individuals don´t have all relevant information for making a decision, but also have the
cognitive abilities to process it. The opposing concept is bounded rationality. You assume
that people use simple heuristics (decision rules) when judging probabilities, instead of
maximize their utility. The use of heuristics, however, often results in biases, meaning
systematic errors.
x Bayesian probability estimation:
Individuals are able to estimate probabilities correctly, given the relevant information.
Bayes theorem:
1.4.1 Representativeness heuristic
x Base rate neglect: Example with disease. 1 of 1000 got it and 5% false positive diagnostic
tests --> bayesian theorem!!
x Conjunction effect: Example with Björn Borg. More detailed descriptions are judged as
more likely or representative. (Teilmengen sind nicht größer als eine einzelne Menge)
x Small samples:
People apply principles that apply to infinite populations also to small samples
o Gambler fallacy: Heads or Tails. Sequence of HHH. Probability that H is coming next
is also 50% as before. A couple of people would say that the probability is lower than
50%. --> Sequence doesn´t continue; Reversion of a trend.
Explanation: relies on people´s assumption that signals are drawn from an urn of
finite size and known distribution without replacement
o Hot hand effect: Basketball fans think that a player´s chance of hitting a shot is
greater following a hit than following a miss. --> Sequence continue; continuation of a
Explanation: relies on people´s assumption that signals are drawn from an urn of
finite size and unknown distribution without replacement
Excerpt out of 41 pages


Behavioral Economics. Lernzusammenfassung
University of Ulm  (Institut für Wirtschaftswissenschaften)
Behavioral Economics / Verhaltensökonomik
Catalog Number
ISBN (eBook)
ISBN (Book)
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Decision Theory, Game Theory, Prospect Theory, Social Preferences, Theory, Bolton, Ockenfels, ERC-Model
Quote paper
Marcus Kreysch (Author), 2014, Behavioral Economics. Lernzusammenfassung, Munich, GRIN Verlag,


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