00_P & B - Chapter 01

they influece each other

Classical economics:

Humans act rational = homo oeconomicus
-> Economists do not assume complete rationality of human behavior. However, their models are based on the assumption that deviations are unsystematic, small and hence
negligible/minor.

Behavioral economics:

Humans act with limited rationality = «bounded rationality» 
-> Deviations from rational behavior are substantial/major and systematic enough, hence they are predictable to develop new descriptive theories of human behaviors 

Classical economics:

Normaitve

• Simplified models, complexities and deviations are ignored
• normative models (Nutzen x Auftretenswahrscheinlichkeit -> Option mit höchstem Wert hat den grössten Nutzen gemäss Modell)
• im Fokus steht der subjektive Nutzen (Entscheidungsalternativen -> welche hat den grössten Nutzen

Behavioral economics:

Descriptive

• wie entscheiden Menschen wirklich und was gibt es für Einflussfaktoren?
• basier auf Prospect Theory (positive Ereignisse -> weniger Risiko / negative -> höheres Risiko)
• Erwartungsnutzen wird nicht als Grundlage genutzt

Classical Economics:

Focus on markets, economies, competition vs. monopoly etc.

Behavioral Economics:

Focus on institutions and on the context in which decisions are made

• Fixed preferences
• Completely rational behavior
• Complete market transparency and foresight
• Immediate reaction to new information
• Utility maximization
• Unlimited self-control

• Classical economics accepts that the homo oeconomicus is not realistic depiction of human behavior
• Homo oeconomicus is used as a simplifying assumption in economic models

The "Altruism" shows that humans do not act completely rational

Selfless behavior (e.g., donating, sponsoring and volunteering) or Stem cell donation

The "Decoy Effect" shows that humans do not have fixed preferences

Designing a product portfolio with certain product attributes and pricing (e.g. iphones)

The "Primacy and Recency Effect" shows that humans do not react mmediately to new information

Example:
Recruitment decisions

Primacy effect (Information at the beginning):
Impressions based on the CV vs information gathered during the subsequent interview

Recency effect (Information at the end)
Judgement is unduly influenced by information obtained towards the end of the interview

Both can perceive longer that other information

The "Anchoring (anchor heuristics)" shows that humans do not react mmediately to new information

Example: Decision-making in organizations

• projects are planned often very optimistic and initial estimates and predictions are actually readjusted once new information becomes available or the market changes
• Anchor = initial estimations
• instead of adjust the estimations if there is new information available, project managers often miss this task due to the anchor and do insufficient adjustments 

Reminder Anchor:
beschreibt den Effekt, dass Menschen bei Entscheidungen von Umgebungsinformationen beeinflusst werden, ohne dass ihnen dieser Einfluss bewusst wird. Die Umgebungsinformationen werden als der „Anker“ bezeichnet, an dem sich die Entscheidung orientiert. Umgebungsinformationen können selbst dann einen Einfluss haben, wenn sie für die Entscheidung eigentlich irrelevant sind. Die Folge ist eine systematische Verzerrung in Richtung des Ankers.

The " Influence of image, trust and subjective impressions " shows that humans do not always maximizing the utility

Example 1: Use of testimonials in advertising, e.g. iPhone vs. Android, Mac vs. PC
Example 2: Use of testimonials in advertising Roger Federer

The "Large number of options: elimination-by-aspect, followed by satisficing heuristic" shows that humans do not always provide complete market transparency and foresight (Vorausschau)

We are usually make choice based on a limited number of alternatives = «consideration set» -> e.g. we are open the Zalando App and looking on that platform for socks

The "Limited self-control -> procrastination" shows that humans do not always have unlimited power

Hyperbolic discounting -> it is very difficult to postpone the temptation (missing self-control)

-> Hence humans do not have unlimited will power

Principles of the models in classical economics: 

Expected utility theory: When choosing between options, humans maximize
their gain based on the calculated expected utility
EUi = Σ pij * uij (probability x amount of utiles) -> Wahrscheinlichkeit x Höhe des Nutzens

Principles of the models in behavioral economics:

Prospect theory: Humans strive to avoid losses, judge probabilities differently from their
actual values and based on (sometimes arbitrary) reference points

e.g. loss aversion, risk aversion, mental accounting

Principles of the models in classical economics: 

Maximizing utility:
Humans strive to maximize their own utility

Principles of the models in behavioral economics:

Social utility / Other-Regarding Preferences:
Humans consider other people’s wellbeing and value fairness

• Field experiment
• Laboratory experiment
• Natural experiment
• Secondary data