Nova workboard

a blog from young economists at Nova SBE

My two cents

It’s December 31st. Some people make New Year’s resolutions that go something like this “I will quit smoking”; “I will live more healthy” etc. I personally don’t believe in those resolutions and rather follow “if you want to get something done rather do it than say it aloud”. So how did I end up sitting here on a Friday night in front of my laptop trying to come up with a topic for this blog entry while all my friends are out having dinner and drinks?

Rational Choice Theory

Completeness: I just seem not to care about this blog entry. I preferred spending my time on other activities.

Transitivity: All the things I did instead of doing my work could be compared with each other in terms of utility.

Independence of irrelevant alternatives: If you show me some new option I still won’t prefer the blog entry to other activities I previously ranked higher.

Time consistency: I knew before that this would happen.

Behavioural Economics

(i) Time inconsistencies: In a multi-period setting there exist one self in each period. Utility is maximised by the current period’s self in every respective period. The discount factors assessed by each “self” however can vary from period to period. In easy: our preferences can change in every period as we reassess them.

(ii) (quasi-)Hyperbolic discounting / present-bias: We put a lot more weight on the present and do not discount at a constant rate (not at a classical delta^n). Instead our valuation decreases very fast for the nearer periods (as in the exponential discounting) but for later periods we discount less severely.

(iii) Impulse control/ cognitive load: When you are hungry and go to a supermarket think about the food you usually end up with. Different literature and a wide range of models exist here. One of my favourites here is Fundenberg and Levine who make a long-run self “fight” short-run oriented selves that share the long-run self’s preferences in each period but differ in valuations. Their model allows by small extensions to model costly (!) self-control as rational. These models allow putting a formal framework to procrastination and delay in our actions.

Overall there is a huge amount of interdisciplinary literature between Economics and Psychology that allows describing observed behaviour. Note that most papers however do not reject classic Economic theory. Most papers rather seek to add additional tools and explanations to an existing set.

So why am I still here writing this? I cannot choose a certain answer from existing literature. A bit of all might be true. The best possible answer I can give is that the grading system in the Syllabus to this course made me sit down after all. Although NOVA does not offer a course on Behavioural Economics Professors are aware that we are not acting as the homo oeconomicus. The fact that the blog entries combined account for 20% while discarding the worst 10% in the end makes this entry at least count for 5% of the final grade. A fine difference creates a good incentive.

See also

#685

A note that does not belong to the entry above:

So what was the purpose of this? Of course mainly to at least pick up a few points. But at the same time I hope that I could show you that there is a broad literature in the domain of Behavioural Economics that is worth exploring.

If you at least show some weak positive interest I recommend you read “Thinking fast and slow” by Daniel Kahneman who won the Nobel prize for his work on prospect theory. It is a nice introduction to some topics in the field and written in a very reader-friendly way that average consumers that do not have any background in the domain {of Economics} can enjoy reading.
The paper I mentioned above is Fundenberg, D. and Levine, D.K.: A Dual-Self Model of Impulse Control . It is slightly technical and I admit not very enjoyable to read at first but a very interesting field of research in my opinion. If you like this try searching for papers in “strategic thinking” (level-k models, ….)

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Author: studentnovasbe

Master student in Nova Sbe

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