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+ 8 Essay questions to plan

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Behavioral Economics: Crash Course Economics #27

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Behavioural Economics and Government Policy (Nudge Policies)

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Behavioural Economics & Biases (Anchoring, Norms, Loss Aversion, Herding...)

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Imperfect Information and Decision Making

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Utility Theory - Total, Marginal and Average Utility

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Teacher's guide: individual economic decision making

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Psychologists and behavioural economists have identified a large number of cognitive biases that can affect people's behaviour. It is not expected that A-level students should have a detailed or wide-ranging knowledge of these biases. However, they should understand that the existence of such biases calls into question economic models that assume people always act rationally, attempting to maximise their individual self-interest.

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Loss Aversion Learn more about Behavioural Economics with Rory at https://www.42courses.com

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The Marshmallow Test | Igniter Media | Church Video

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The odds are you won't know when to quit

'The truth is that there are no foolproof methods for knowing when to hold 'em and when to fold 'em'

There is a strong case to be made for persistence. As a child I was told the legend of Robert the Bruce. Cowering and hiding in some dank cave in Scotland, he felt like giving up his struggle against the English. Then he noticed a spider repeatedly failing to spin a web before eventually succeeding. Heartened, King Robert returned to give the English a sound thrashing in 1314. Even for an English boy, it was an inspiring tale. If at first you don't succeed, try again.

But there is an equally strong case to be made against being stubborn. When Irving Fisher and John Maynard Keynes failed to predict the Wall Street Crash of 1929, the two great economists reacted differently. Fisher stuck to his guns; Keynes shrugged and changed direction. Fisher was ruined; Keynes died a millionaire. If at first you don't succeed, do something different next time.

Do we tend to quit too soon or quit too late? Are we too stubborn or not determined enough? There has been much excitement recently around the idea of "grit" - a personality trait representing commitment to and enthusiasm for long-term goals, championed by psychologist Angela Duckworth. She argues, plausibly, that grit is more important than talent in predicting a successful life.

The idea is appealing in principle but one must ask what Duckworth's brief "grit" questionnaire is really measuring. (Perhaps I am just sore because I took the questionnaire and discovered I have less grit than the average marshmallow.)

While Duckworth's work suggests that perseverance is vital, other psychological research suggests that we sometimes persevere when we should not. Nobel laureate Daniel Kahneman, with the late Amos Tversky, discovered a tendency called "loss aversion". Loss aversion is a disproportionate dislike of losses relative to gains, and it can lead us to cling on pig-headedly to bad decisions because we hate to stop playing when we're behind.

My favourite study of loss aversion concerns players of the TV game show Deal or No Deal, in which players must periodically decide whether to keep gambling or accept an offer from the mysterious "Banker" to buy them out of the game. In one notorious Dutch episode, a contestant named Frank was offered €75,000 to stop; he kept playing and lost his next gamble. The Banker's next offer was just €2,400, which was actually a fair offer. But at that point loss aversion kicked in. With the lost €75,000 in mind, Frank refused all further deals, kept gambling and kept losing. He eventually won just €10.

A study of Deal or No Deal by behavioural economists including Thierry Post and Richard Thaler found that while Frank's fate was spectacular, his behaviour was statistically typical. People hate to quit if they feel they're losing.

Loss aversion warps investment strategies in a similar way. We happily sold our stocks in Google and Apple but clung on to those in Enron and Lehman Brothers. The same tendency affects house prices: we hate to sell for less than we paid. Recent research by Alasdair Brown and Fuyu Yang finds that the same thing is true when people are offered the opportunity to cash in a bet on a sporting event that is still in progress. They are happy to cash out if their team is a goal up, even though that will cut their possible gains, but they will cling on if their team is a goal down even though they could cut their losses.

I was struck by a recent FT article by equity analyst Daniel Davies describing how a portfolio based on expert research recommendations would tend to do badly, but if the same portfolio had a "stop-loss" rule that simply jettisoned stocks after a 10 per cent loss, it would tend to do very well. The stop-loss rule cancelled out the instinctive tendency to hold on stubbornly to losers. Yet Warren Buffett seems to do very well by buying and holding.

The truth is that there are no foolproof methods for knowing when to hold 'em and when to fold 'em. But I have three suggestions. The first is to look resolutely away from sunk costs and towards future prospects. Whether you paid $70 or $130 for your Apple shares should be irrelevant to your decision to sell them today for $100. Bygone profits and losses are a distraction.

The second is to persevere flexibly rather than stubbornly. Angela Duckworth's family follows a "hard thing" rule: the children have to choose an activity, such as music or athletics, that requires dedication and practice. They're allowed to quit but only at a natural break point and only if they find an alternative "hard thing". That seems to steer a course between the Scylla of obstinacy and the Charybdis of laziness.

The third is to view decisions as experiments. Signing up to learn the violin is an experiment; so is moving cities or careers. Of course, one can end an experiment too early or doggedly persist too long. But viewing a decision as an experiment gives a useful perspective because experiments are always designed to teach us something. We can keep asking: what have I learnt? And am I still learning? If a new project or activity keeps teaching us new things, it is probably worth continuing - even if the lessons are sometimes painful.
Written for an first published at ft.com.

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The odds are you won't know when to quit

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'The truth is that there are no foolproof methods for knowing when to hold 'em and when to fold 'em' There is a strong case to be made for persistence. As a child I was told the legend of Robert th...

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Tim Harford - tutor2u - Rory Sutherland

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Collin Camerer

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Iocane Powder Battle of Wits "Princess Bride"

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Iocane Powder Tshirt available here: http://www.nowherebad.com/previously limited printing ONLY available from november 18, 19, 20, 21, 2011 classic scene from a classic movie! iocane powder iocaine powder Princess Bride the princess bride "The Princess Bride (film)" Inconceivable battle of wits ---- DISCLAIMER!

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Alex Laskey: How behavioral science can lower your energy bill | TED Talk

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What’s a proven way to lower your energy costs? Would you believe: learning what your neighbor pays. Alex Laskey shows how a quirk of human behavior can make us all better, wiser energy users, with lower bills to prove it.

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Piano stairs  - TheFunTheory.com - Rolighetsteorin.se

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Consumer Behaviour

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More than just picking numbers

This game is a classic one for many psychologists, game theorists and behavioral economists because it highlights the trouble that most people have in thinking more than one or two steps ahead.

Many people may start by realizing that 50 would be roughly the average answer if everyone picked a random number - and then calculating that 33 is two-thirds of 50. But if everyone picked 33, then 22 would be the winning answer. So many people go one step beyond the obvious and give answers around 20 - or they somehow land there intuitively.

The question is why more people don't keep going and say: Well, 15 is about two-thirds of 22, and 10 is two-thirds of 15 ... and on and on. Eventually, we'll get to zero, so that's what I'll say.

An answer of zero would be what's known as the Nash equilibrium of this game: the answer people would give after knowing the other players' answers and being given infinite opportunities to change their own. In a world of hyper-rationality, the answer to this game would be the Nash equilibrium. Or as Richard Thaler, a founder of behavioral economics, wrote in " Misbehaving," his recent memoir: "The Nash equilibrium in this game is a number that if everyone guessed it, no one would want to change their guess."

Instead of reaching this equilibrium, people instead display what the economist Colin Camerer has called "k-step thinking."

You may be familiar with k-step thinking even if you've never heard the term before - from the 1987 film " The Princess Bride." The hero, Westley, challenges the villain Vizzini to a battle of wits: Westley will put a deadly dose of "iocaine" poison in one of two cups of wine, placing one cup in front of each man, but concealing which one is where. Vizzini must decide whether to choose the one in front of him, or the one in front of Westley - and Westley will drink from the other. To win the battle of wits, Vizzini must guess whether Westley would knowingly put a poisoned cup in front of himself. Here's just one of Vizzini's lines of reasoning:

Iocaine comes from Australia, as everyone knows. And Australia is entirely peopled with criminals. And criminals are used to having people not trust them, as you are not trusted by me. So I can clearly not choose the wine in front of you.

Eventually, Vizzini drinks from the poisoned cup and dies. (In truth, Westley had poisoned both cups.*)

In our game, someone who guessed randomly is a 0-step thinker. Mr. Camerer, Teck-Hua Ho and Juin-Kuan Chong say these guessers are "fatigued, clueless, overwhelmed, uncooperative, or simply more willing to make a random guess in the first period of a game and learn from subsequent experience than to think hard before learning." If you were not one of the random guessers, if you made some effort to imagine what other players might do, you probably believed other players used one fewer step than you did.

For most people, k is a small number: one, two, three or four. It's just not natural for most of us to think multiple steps ahead.

Examples abound in everyday life. Many people believe that it's better to sell a house in the spring, for example, because more buyers are looking then. But what really matters is the ratio between buyers and sellers. You'd rather sell your house when your town has 20 buyers and only 2 sellers than when it has 100 buyers and 500 sellers.

In a highly networked world, these calculations become all the more important. If Uber fares are surging downtown, Uber drivers who happen to be uptown need to think about whether prices will still be surging by the time they can get downtown. People using an online dating site need to think about the desires of their potential mates - and the strategies that the competition is using.

But the best example is probably the stock market. As John Maynard Keynes noted, the goal in the stock market is not necessarily to pick the best company. It is to pick the company that others think will be the best company. In fact, it is to pick the company that others think that others think that others think - and so on - is the best company. He used a "beauty contest" to describe this idea, after a fictional newspaper contest in which readers had to guess the most beautiful face from a gallery of faces.

In the stock market - or the housing market, for that matter - people often struggle to think more than one or two steps ahead. That's a big reason that bubbles can form. It was true that a lot of dot-com companies from the 1990s were on to something new and important, just as it was true that housing prices rarely fall. But if everybody else decides that dot-com stocks and houses are a great investment, a problem can easily develop. The prices of those assets can rise so high that they're no longer a good value.

The initial instinct wasn't wrong. The failure to think ahead was the error.

It's a weakness we all have. The best way to combat it is to be aware of it - and push back against it.
We want to thank Christopher Nguyen, the chief executive of Adatao, a data-intelligence company, who originally gave us the idea for this game. We also want to note that The Financial Times ran versions of the game for its subscribers both in 1997 and this year. In the first version, the winning answer was 13; more recently, it was 12. Avinash Dixit's "Restoring Fun to Game Theory" includes a longer discussion of the theory behind the "battle of wits" in "The Princess Bride."

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Are You Smarter Than Other New York Times Readers?

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This game is a classic one for many psychologists, game theorists and behavioral economists because it highlights the trouble that most people have in thinking more than one or two steps ahead. Many people may start by realizing that 50 would be roughly the average answer if everyone picked a random number - and then calculating that 33 is two-thirds of 50.

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To What Extent is Behavioral Economics a solution to all of neo-classical economics' problems

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To What Extent is Behavioral Economics a solution to all of neo-classical economics' problems

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Here is an essay plan on the following question: "To what extent is behavioural economics a solution to all of neo-classical economics' problems?"

Neo-classical economics has been the dominant force in economic thinking and policy-making for many years. It formulates precise economic laws regarding production and consumption through the calculation of cost and benefit at the margin. Consumers and businesses are both assumed to act rationally, consumers optimise their purchasing power by equating the marginal utility per pound spent, whilst producers seek to maximise profits in both product and labour markets. Neo-classical economics believes in the concept of equilibrium and the power of market forces to achieve an efficient allocation of resources. Yes, there are instances of partial and complete market failure, but neo-classical economics favours the usefulness of conventional interventions such as taxation and subsidy to change incentives by altering relative prices and thus alter behaviour to help align social cost and benefits.

The neo-classical model of behaviour is built on these assumptions:

Agents choose independently

An agent has fixed tastes and preferences

Agents gather complete information on alternatives choices

Agents always make optimal choice given his/her preferences

This is not just a micro-model (associated for example with the standard theory of the firm), it is also the foundation of much of macroeconomics e.g. rational expectations theory. In other words, neo-classical economics has been for decades wedded to " Homo Economicus " (a selfish and utility-maximizing, unboundedly-rational agent).

The emerging critique of neo-classical economics came first from economists who questioned whether there was complete information. Akerlof and Stiglitz (jointly awarded the Nobel prize) showed that agents may suffer from information failure - for example, there are many information asymmetries and this can lead to sub-optimal decisions (aka market failure). But in their work agents were still assumed to make the 'best' choice given the information they have. The work of Stiglitz and Akerlof extended the realism of conventional theory and has been widely absorbed into mainstream economics, especially policies designed to change the information available to consumers when the government is trying to change consumption of merit and de-merit goods.

Simon in an important paper published in 1955 added further to the questioning of neo-classical economics with his concept of bounded rationality. Most consumers and businesses are unable to make fully-informed judgements when making their decisions and the increasing complexity of products makes life difficult. People have limited attention spans and computational capacity. Bounded rationality suggests that consumers and businesses opt to satisfice rather than maximise. They will use rules of thumb (known as heuristics) and approximations when active across different markets. Behavioural economists point out that bounded rationality is not the same as irrationality, because decision-makers are still attempting to make as rational a decision as possible.

Behavioural economics started to emerge with the ground-breaking work of Kahneman and Tversky (again both awarded the Nobel for Economics although Tversky died before it was given). 'Agents reason poorly and act intuitively' according to Kahneman. This view was based upon numerous experiments in which there is a 'rational' answer but people frequently don't choose it. Systematic deviations from rationality were observed challenging many of the assumptions of conventional thinking. Indeed, Thaler - who has popularised the concept of nudges - has argued that "the real point of behavioural economics is to highlight behaviours that are in conflict with the standard rational model."

In behavioural models:

People have limited computational capacity - they aim to satisfice rather than maximise

They are strongly influenced by social networks (where copying behaviour is common) and by prevailing social norms

They often act reciprocally by making kind and generous gestures

They lack self-control and they tend to be present-biased (for example by heavily discounting future benefits in favour of now)

They are loss averse - hating losses far more than commensurate gains

Their behaviour is strongly attached to existing default choices

They are influenced to some extent by persistent cognitive biases. A bias is a systematic deviation from what is believed to be rational choice

Neo-classical economics assumes that all agents act rationally in their own self-interest. In contrast, behavioural economics emphasises altruism. This is when humans behave with more kindness and fairness than would be the case if they behaved rationally. Altruism is often linked to the concept of inequity aversion i.e. humans do not like unequal outcomes.

There are many cognitive biases that can affect behaviour. One is the anchoring effect when people rely heavily on an irrelevant piece of information to help us make a decision. Another is the availability heuristic where we tend to over-estimate the likelihood of something happening because a similar event has either happened recently or because we feel emotional about a previous similar event. The optimism bias finds that people tend to be overly confident about the outcome of planned actions and decisions and the scarcity bias is the tendency to value something more if it is thought of as rare.

An important aspect of behavioural theory is loss aversion. The basic idea behind loss aversion is that people feel losses much more than gains. We see this often in financial markets for example when stock market investors hold their investment positions with paper losses too long (hoping to that share prices will recover) and sell their investment positions with paper gains too early.

A modern economy dominated by knowledge and information services and where networks are vitally important is better suited to ideas drawn from behavioural economics. Incentives still matter but behavioural economics suggests that the motivations we have when making choices are not those that are taught in orthodox economics. When it comes to addressing persistent economic and social problems such as gambling addiction, rising obesity, anti-social behaviour and the causes of instability in financial markets, behavioural ideas seem to have plenty of validity.

That said whilst Behavioural economics can make a major contribution to overcoming the limitations of Neo-classical economics it is not necessarily a solution. The Behavioural Economics approach itself has been criticised. For example, the use of laboratory experiments has come under sustained attack in recent years. Many experiments have involved using a skewed WEIRD cohort - i.e. many people involved in the tests were drawn from Western, Educated, Industrialised, Rich and Democratic Countries and therefore not a representative sample. Secondly, our observed behaviour in the laboratory is unrealistic - tests normally use small stakes involved in the dilemmas with few real and lasting financial consequences for participants. Thirdly, discoveries about the past from behavioural experiments do not easily generalise to the future - the social context for one generation is often different from another. Mainstream economists from the Neo-classical school challenge behavioural theorists by saying that consumers, given sufficient incentives, will eventually learn that their behaviour deviates from that of the rational model and adjust accordingly.

In my opinion, the academic discipline of Economics should also draw on new ideas from other subjects. For example, we are becoming more expert in understanding neuro-economics - how our brain processes decisions and the limitations that our neuro-system imposes on our choices. Cognitive overload is common when we are faced with a huge array of choices and people frequently fall back on simple heuristics in these situations.

Economics can also learn much about behaviour from studying the Physics of networks and from Linguistics about how the language of communication can change behaviour. If more students were to take courses in History alongside conventional Economics modules, they might be able to understand deeper historical patterns for example in financial markets. The subject can also benefit from lessons from Anthropology which studies cultural influences on behaviour. From Anthropology we learn that humans are complex psychological beings living in different social contexts in which self-interest and altruism are often inter-twined. Most people have an innate sense of fairness in how scarce resources are allocated within a community.
Final reasoned comment

Neo-classical economics has built equilibrium models that have increasingly become divorced from the lives of real people and businesses. In our complex world where uncertainty is the new normal we cannot use a 'one size fits all' model for understanding the economy. Behavioural economics is not a solution but, as Paul Ormerod has argued, "An economist can no longer be said to have a good training in economics if he or she is not familiar with the main themes of behavioural economics."

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Behavioural and Neo-Classical Economics (Essay Plan) | tutor2u Economics

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Here is an essay plan on the following question: "To what extent is behavioural economics a solution to all of neo-classical economics' problems?" Neo-classical economics has been the dominant force in economic thinking and policy-making for many years. It formulates precise economic laws regarding production and consumption through the calculation of cost and benefit at the margin.

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Create a new document and edit with others at the same time -- from your computer, phone or tablet. Get stuff done with or without an internet connection. Use Docs to edit Word files. Free from Google.

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Public Policy Issues and Behavioural Concepts

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Behavioural Economics - Policies in Action

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This is the second of two revision webinars on behavioural economics. In it we look at a range of soft and harder behavioural nudges designed to change behaviour at a micro level. We focus on the EAST framework for behavioural change, namely that interventions are more effective when they are easy, attractive, social and timely.

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"It turns out that the environmental effects on behaviour are a lot stronger than most people expect" (Daniel Kahneman). This short video looks at the four aspects of the East Framework as a basis for achieving behavioural change through behavioural nudges and other incentives.

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Behavioural Economics - Bounded Rationality

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Bounded rationality is the idea that the cognitive, decision-making capacity of humans cannot be fully rational because of a number of limits that we face.

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The basic idea behind loss aversion is that people feel losses much more than gains. Loss aversion is often seen in financial markets: Some evidence that stock market investors hold their investment positions with paper losses too long and sell their investment holding paper gains too early.

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​In this short video I look at some examples of behavioural nudges in action including changes of choice architecture and default options as a way of influencing the decisions that people make.

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A phenomenon in which individuals act collectively as part of a group, often making decisions as a group that they would not make as an individual. There are 2 generally accepted explanations of herd behaviour. 1.

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Behavioural Economics - Availability Bias

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The availability bias happens when we overestimating the likelihood of something happening because a similar event has either happened recently or because we feel very emotional about a previous similar event.

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People prefer to carry on behaving as they have always done even when the circumstances that might influence their decisions change. Repeat choices / purchases often become automatic because default choices don't involve much mental (cognitive) effort. The default choice or default option is the option that a consumer "selects" if he or she does nothing.

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Traditional economics assumes that people make choices independently of one another. Behavioural economists believe that most decisions are taken in a social context within social networks. Individuals are influenced by social preferences, identities, and norms. Many people imitate the behaviour of others almost automatically.

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Behavioural Economics - Choice Architecture

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​In short, choice architecture is the framing of a choice in order to manipulate the outcome of someone's decision.​

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Behavioural Economics - Commitment Contracts

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​This short video looks at the nature of commitment contracts as a way of encouraging people to follow through with behaviours that might improve their health or other aspects of their lives. We often use commitment devices to voluntarily 'lock ourselves' into doing something in advance.

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Humans have a strong scarcity bias. We unconsciously assume things that are scarce are valuable and things that are abundant are not. The scarcity bias impulse frequently kicks in when we are told that a product is in short supply and we might miss a great deal unless we book/pay now!

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In general terms, a heuristic is a method or technique that people use to help them make a decision or solve a problem more quickly. We often use the phrase rule of thumb to mean the same thing. The outcome from using the heuristic may not be perfect or optimised, but is usually "good enough".

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Our behaviour is often influenced by cues that work subconsciously and prime us to behave / choose in certain ways. This short video looks at priming and how it can affect the choices we make.

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Anchoring is the use of (usually) irrelevant information as a reference point for helping to make an estimate of an unknown piece of information. In other words, people use an "anchor point" of an event or a value that they know in order to make a decision or estimate.

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This is a quick primer on the ways in which behavioural economics challenges the assumptions the null model of agent behaviour that dominated conventional economics for decades.

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Behavioural Economics - Theory in Action

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In this revision webinar on behavioural economics, we look at a range of key behavioural ideas such as loss aversion, choice architecture, framing, priming, anchoring, default bias, bounded rationality and social norms. We then cast an eye on real world examples of business who have drawn on behavioural insights for commercial gain.

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Behavioural Economics | tutor2u Economics

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores. For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).