EC305 Chapter Notes - Chapter 2: Investment Goods, Mental Accounting, Arbitrage
Document Summary
The goal of much of the research on individual choice in behavioral economics aims to show that people often make irrational decisions. Individuals are subject to numerous perceptual biases (don"t always process information correctly or objectively) & cognitive limitations (can"t fully think through the problem) Preferences over losses are the reflection/reverse of preferences over gains in the domain of gains, individuals are risk-averse (avoid risks, seek certainty) in the domain of losses, individuals are risk-loving (seek risk, avoid sure losses) Reference points individuals evaluate outcomes relative to some reference point, typically their initial situation (before the change) or their expectation (e. g. , wage increase) Framing effect in two identical situations, an individual chooses differently because the two scenarios are described or framed differently. Imagine that the u. s. is preparing for the outbreak of an unusual asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed.
