ECON 101 Lecture Notes - Lecture 28: Bounded Rationality, Loss Aversion, Behavioral Economics
Document Summary
Individuals make limited amount of income so when they choose to consume more of a good to consumer (clothes) they must choose less of another good (restaurant dinners) A cost that has already been incurred and is non-recoverable. Should be ignored in making decisions about future actions. Because they have already been incurred and are non-recoverable, they have no effect on future costs and benefits. Combines economic modeling with insights from human psychology. A rational decision maker always chooses the available option that leads to the outcome he or she most prefers. Reasons why people might prefer a lower economic payoff: Making a choice that is close to but not exactly the one that leads to the greatest possible economic payoff because the effort of finding the best payoff is too costly; the good enough method of decision-making. Willingness to sacrifice some economic payoff in order to avoid a potential loss.
