Introduction to Behavioral Economics

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  • Format: Paperback
  • Copyright: 2013-11-25
  • Publisher: John Wiley & Sons Inc

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Introduction to Behavioral Economics is focused on the broad principles of behavior, which are illustrated using real-world examples from experimental literature as well as experiential examples. Real-world examples are drawn from news items, historical accounts and the economics literature. Experimental examples are drawn from the economics literature. These examples are discussed providing explanatory figures and interpretations. With the rise of both behavioral finance and behavioral industrial organization, undergraduates now clamor for formal training and instruction in behavioral economics. Introduction to Behavioral Economics covers all the ways consumers and other economic agents behave in nonrational manner and prepares readers to make rational economic choices. This text provides experiments as a set of examples of the broader principles of behavior.

Table of Contents


Chapter 1. Rationality, Irrationality and Rationalization

Rational Choice Theory and Rational Modeling

Rationality and Demand Curves

Bounded Rationality and Model Types

The Special Relationship between Behavioral Economics and Experimental Economics

Thought Questions

Suggested Readings

Appendix A. Deriving Demand Curves

Part I. Consumer Purchasing Decisions

Chapter 2. Transaction Utility and Consumer Pricing

Rational Choice with Fixed and Marginal Costs

Fixed versus Sunk Costs

The Sunk Cost Fallacy

Theory and Reactions to Sunk Cost

History and Notes

Rational Explanations for the Sunk Cost Fallacy

Transaction Utility and Flat-Rate Bias

Procedural Explanations for Flat-Rate Bias

Rational Explanations for Flat-Rate Bias

History and Notes

Transaction Utility and Consumer Preferences in Reference

Theory and Reference Dependent Preferences

Rational Explanations for Context Dependent Preferences

Thought Questions

Suggested Readings

Appendix: Fixed Costs and Rational Choice

Chapter 3. Mental Accounting

Rational Choice with Income from Varying Sources

The Theory of Mental Accounting

Budgeting and Consumption Bundles

Accounts, Integrating or Segregating

Payment Decoupling, Pre-purchase and Credit Card Purchases

Investments and Opening and Closing Accounts

Reference Points and Indifference Curves

Rational Choice, Temptation and Gifts versus Cash

Rational Choice over Time

Rational Explanations for Source Based Consumption and Application

Thought Questions

Suggested Readings

Chapter 4. Status Quo Bias and Default Options

Rational Choice and Default Options

Preference Formation, Framing and the Default Option

Rational Explanations of the Status Quo Bias

History and Notes

Reference Points, Indifference Curves and the Consumer Problem

An Evolutionary Explanation for Loss Aversion

Rational Choice and Getting and Giving Up Goods

Loss Aversion and the Endowment Effect

Rational Explanations for the Endowment Effect

History and Notes

Thought Questions

Suggested Readings

Appendix: The Shape of Indifference Curves with Constant Loss Aversion

Chapter 5. The Winner’s Curse and Auction Behavior

Rational Bidding in Auctions

Procedural Explanations for Overbidding

Levels of Rationality

Bidding Heuristics and Transparency

Rational Bidding under Dutch and First Price Auctions

History and Notes

Rational Prices in English, Dutch and First Price Auctions 

Auction with Uncertainty

Rational Bidding under Uncertainty

The Winner’s Curse and Anchoring and Adjusting

History and Notes

Rational Explanations for the Winner’s Curse

Thought Questions

Suggested Readings

Appendix: Bayesian Nash Equilibrium and Bidding under Uncertainty

Part II. Information and Uncertainty

Chapter 6. Bracketing Decisions

Multiple Rational Choice with Certainty and Uncertainty

The Portfolio Problem

Narrow versus Broad Bracketing

Bracketing the Portfolio Problem

More than the Sum of Its Parts

The Utility Function and Risk Aversion

Bracketing and Variety

Rational Bracketing for Variety

Changing Preferences, Adding Up and Choice Bracketing

Addiction and Melioration

Narrow Bracketing and Motivation

Behavioral Bracketing

History and Notes

Rational Explanations for Bracketing Behavior

Thought Questions

Suggested Readings

Appendix: The Portfolio Problem

Appendix II: Bracketing the Portfolio Problem

Chapter 7. Representativeness and Availability

Statistical Inference and Information

Calibration Exercises


Conjunction Bias

The Law of Small Numbers

Conservatism versus Representativeness

Availability Heuristic

Bias, Bigotry and Availability

History and Notes

Thought Questions

Suggested Readings

Chapter 8. Confirmation and Overconfidence

Rational Information Search

Confirmation Bias

Risk Aversion and Production


Self-Serving Bias

Is Bad Information Bad?

History and Notes

Thought Questions

Suggested Readings

Chapter 9. Decision under Risk and Uncertainty

Rational Decision under Risk 

Modeling Intransitive Preferences: Regret and Similarity

Independence and Rational Decision under Risk 

Allowing Violations of Independence

The Shape of Indifference Curves

Evidence on the Shape of Probability Weights

Probability Weights without Preferences for the Inferior

Practical Implications of Violations of Expected Utility

What to Do When You Don’t Know What Can Happen

History and Notes

Thought Questions

Suggested Readings

Appendix 9.A The Continuity Axiom

Chapter 10. Prospect Theory and Decision under Risk or Uncertainty

Risk Aversion, Risk Loving and Loss Aversion

Prospect Theory

Prospect Theory and Indifference Curves

Does Prospect Theory Solve the Whole Problem?

Prospect Theory and Risk Aversion in Small Gambles

History and Notes

Thought Questions

Suggested Readings

Part III. Time Discounting and the Long and Short Run

Chapter 11. Disagreeing with Ourselves: Projection and Hindsight Biases

The Standard Models of Inter-Temporal Choice

Making Decisions for Our Future-Self

Projection Bias and Addiction

The Role of Emotions and Visceral Factors in Choice

Hindsight Bias and the Curse of Knowledge

History and Notes

Thought Questions

Suggested Readings

Chapter 12. Naïve Procrastination

The Fully Additive Model

Discounting in Continuous Time

Why Would Discounting be Stable?

Naïve Hyperbolic Discounting

Naïve Quasi-Hyperbolic Discounting

The Common Difference Effect

The Absolute Magnitude Effect

Discounting with A Prospect Theoretic Value Function

History and Notes

Thought Questions

Suggested Readings

Chapter 13. Committing and Uncommiting

Rationality and the Possibility of Committing

Commitment under Time Inconsistency

Choosing When to Do It

Of Sophisticates and Naïfs 


History and Notes

Thought Questions

Suggested Readings

Appendix A: The Continuous Choice Problem with Backward Induction

Part IV. Social Preferences

Chapter 14. Selfishness and Altruism

Rationality and Altruism

Rationally Selfless?

Selfishly Selfless

Public Goods Provision and Altruistic Behavior

History and Notes

Thought Questions

Suggested Readings

Chapter 15. Fairness and Psychological Games

Inequity Aversion


Kindness Functions

Psychological Games

History and Notes

Thought Questions

Suggested Readings

Chapter 16. Trust and Reciprocity

Of Trust and Trustworthiness

Trust in the Marketplace

Trust and Distrust


History and Notes

Thought Questions

Suggested Readings


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