Lernkarten
Decision-making under certainty
- What kind of decision-making model exist for "Classical economics" and "Behavioral Economics"
Classical economics -> rational (choice) model
Behavioral Economics -> behavioral model & procedurally rational model
Decision-making under certainty
- Model of decision-making in classical economics:
- Describe the "rational (choice) model"
- Which six attributes of homo economics belongs to rational (choice) model?
Classical economics accepts that the homo oeconomicus is not a realistic depiction of human behavior but is used as a simplifying assumption in economic models (models have to simplify reality)
- Fixed preferences
- Completely rational behavior
- Complete market transparency and foresight
- Immediate reaction to new information
- Utility maximization
- Unlimited self-control
Decision-making under certainty
- Describe the "behavioral model" of decision-making in behavioral economics:
- Describes behavior based on observations («what»)
- No assumptions about motivation that might cause the behavior («why»)
Description of behavior that deviates (abweichen) from rational behavior
Decision-making under certainty
- What are advantages and limitations of the "behavioral model" of decision-making in behavioral economics:
Advantages of the model:
- based in observations
- Is usually precise for the type of situations in which the observations were made
Limitations of the model:
- Misinterpretation possible because no assumptions are made about the motivation («why») as they are not observable; this also makes it difficult to generalize any conclusions made about the decision-making
Limitations of the model
Decision-making under certainty
- Describe the "procedurally rational model" of behavioral economics
people act with limited rationality = «bounded rationality»
More realistic model of problem solving, because humans have:
- Limited information available
- Limited information-processing capacity
- Limited time available
Principle: Investing a reasonable amount of resources in the decisionmaking
process to achieve a satisfying result -> rule of thumb: You can get headphones from about
10 CHF. If I spend 70 CHF, I should get a pretty decent model.
-> a reasonable amount of resources is invested in the decision-making process to achieve a satisfying result
-> it is neither advisable nor possible to maximize utility -> (1) not all information is available, (2) trade-off between invested time and gained ut
Decision-making under certainty
- What are the advantages of the "procedurally rational model" of behavioral economics
- Is not based on the assumption of that individuals are perfectly rational decision-makers
- Good predictions of human behavior across different situations
Decision-making under certainty
- What are the advantages of classical economics and behavioral economics?
to explain, predict and influence human decision making in the economic context
Decision-making under certainty
- Which role plays the "utility" from the classical economics and behavioral economics perspective?
Concept of «utility» plays an important role in economic decision-making Utility according to economic theory:
= Total satisfaction received from consuming a good or service
- Assumption: consumers strive to maximize their utility
- Utility directly influences the demand, and therefore price, of a good or service
