ECON 2106 Study Guide - Quiz Guide: Maurice Allais, Status Quo Bias, Moral Hazard
14 Mar 2018
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Economists use a number of concepts from behavioral economics to explain how people make choices that display irrational behavior. These concepts include bounded rationality, misperceptions of probabilities, framing effects and priming effects, the status quo bias, intertemporal decision-making, judgments about fairness, preference reversals, and prospect theory. Foldi(cid:374)g the (cid:271)eha(cid:448)ioral approa(cid:272)h i(cid:374)to the sta(cid:374)dard (cid:373)odel (cid:373)akes e(cid:272)o(cid:374)o(cid:373)ists" predi(cid:272)tio(cid:374)s a(cid:271)out human behavior much more robust. Risk influences decision-making because people can be risk-averse, risk-neutral, or risk-takers. In the traditional economic model, risk tolerances are assumed to be constant. If an individual is a risk-taker by nature, he or she will take risks in any circumstance. Likewise, if an individual does not like to take chances, he or she will avoid risk. Maurice allais proved that many people have inconsistent risk preferences, or what are known as preference reversals. Moreover, he showed that si(cid:373)pl(cid:455) (cid:271)e(cid:272)ause so(cid:373)e people"s prefere(cid:374)(cid:272)es are not constant does not necessarily mean that their decisions are irrational.
