Chapter 4 - Incentives (V. Behavioural economics) (2016)

Apunte Inglés
Universidad Universidad Pompeu Fabra (UPF)
Grado International Business Economics - 1º curso
Asignatura Introduction to business law
Año del apunte 2016
Páginas 3
Fecha de subida 20/04/2016 (Actualizado: 20/04/2016)
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IV. Incentives - Behavioral economics INDEX 14. Willingness to accept/pay .......................................................................................... 2 ENDOWMENT EFFECT................................................................................................... 2 15. Hindsight bias ............................................................................................................. 3 16. Framing effects ........................................................................................................... 3 17. Anchoring.................................................................................................................... 3 1 avillagrasa IBE, 1st year - 2nd Term 14. Willingness to accept/pay It studies how individuals assign different values to goods, so we can always agree on a price if the willingness to accept is lower than the willingness to pay.
But in behavioural economics they realized that the willingness to accept/pay depends on if the object is mine or not. It is related with the Coase Theorem. They did an experiment to prove this: - Students were given mugs and were asked for how much they would sell he mug.
Other students didn’t have mugs and were asked for how much they would be willing to pay for the mugs. Finally, the ones with the mug wanted to sell them for a higher price than the one they would be willing to accept for a mug if they had to buy them.
ENDOWMENT EFFECT This is the endowment effect, also called Statu Quo Bias which is the difference between the price I would accept for an object and the price I would be willing to pay for that same object. This shows that the Coase Theorem is not longer so true (only if information is complete1). Anyway, with this experiment they proved that it was important to whom we gave the property.
REASONS: - Wealth effects: I feel richer Sentimental value theorem: it has a personal value for me Loss aversion (prospect theory): I don’t want to lose my “wealth”. We’re not happy if I paid 100 and won 100, because of the asymmetric value function).
Also we wonder if we could have made more money (opportunity cost).
LEGAL IMPLICATIONS:  Takings  Accident loss: we may not pay a 10€ guarantees, but if I not pay it and the accident happens, I will ask for more than 10€ compensation  Contract negotiations 1 This only happens in the perfectly competitive market (the stock market) 2 avillagrasa IBE, 1st year - 2nd Term 15. Hindsight bias It’s the people that change their minds after the accident has happened. It means that after the accident has occurred you say “it was so obvious to predict”.
16. Framing effects Depending on how you ask things, answers/decisions will be affected. They also did an experiment: - There are 600 people that may die from an insurance, and we have to decide which program should we take: a) 200 people will be saved b) 600 people will be saved in 1/3 probability but no one will be saved in 2/3 probability Even though the outcome of saved people is the same (200) most people choose A, because it is wrote in positive terms (who will be saved and not who will die) 17. Anchoring The perception changes depending on which information we have. Everything is relative (“100 people failed the exam” but we don’t say that 1000 people took that exam, or we can say “500 people passed the exam” but we don’t say that there were 1000 people taking it).
The main idea is that you will use as an anchor, benchmark, the information you have, and so your predictions will be relative to the information you have.
This is used in marketing but also in a trial to make the judge be “in your side” 3 avillagrasa IBE, 1st year - 2nd Term ...