Behavioral Economics and the Basics
What is the theory of Behavioral Economics?
Combines elements of economics and psychology to understand how and why people behave the way they do in the real world.
What is Deductive Reasoning?
Reasoning based upon assumed premises (i.e., you take established facts to reason to other facts)
Ex: Justin is a man -> men are mortal -> Justin is mortal
We judge ______ based on __________ processes.
quickly; automatic
What is the Representativeness Heuristic?
Bonus: Give and example
The probability of an event is judged based on how much one event resembles another event
Ex: Flipping a coin is random in general, so each instance, even if a small sample, should also 'look random'
The most common reasoning people make from a population to an instance is...
The assumption that any given sample resembles the group
Actuality: Smaller samples are less likely to be representative of the population
What two researchers created the theory of Behavioral Economics?
Kahneman and Tversky
What is Inductive Reasoning?
Reasoning based on observations (i.e., you start with observations and reason general conclusions)
Ex: Scientific observations
Conclusions are not necessarily true
What are Heuristics?
“Rules of thumb” that are likely to provide the correct answer to a problem but are not foolproof
Engineers and Lawyers Study: When asked whether Jack was more likely to be a lawyer or an engineer based on a list of traits, what judgement did the people in the 30% engineers, 70% lawyers guess versus the people in the 70% engineers, 30% lawyers guess?
Participants in the 30% condition judged Jack just as likely to be an engineer as participants in the 70% condition.
What is the Law of Large Numbers?
The larger the number of individuals that are randomly drawn from a population, the more representative the resulting group will be of the entire population.
Define Judgement vs Reasoning vs Decision-Making.
Judgement: making an evaluation
Reasoning: process of drawing a conclusion
Decision-Making: process of choosing between alternatives
What three factors affect Inductive Reasoning?
1.Number of observations
2.Representativeness of observations
3.Quality of evidence (what’s the source?)
Which System uses Heuristics?
System 1
As demonstrated in the Engineers and Lawyers study, what sort of neglect happened with participants?
Base Rate Neglect (ie, ignoring how likely it actually was for him to be wither a lawyer or an engineer)
How good are people at applying the Law of Large Numbers?
People generally fail to apply this law, and instead assume every sample will be equally representative of the entire population.
What is Induction?
Induction: Drawing general conclusions from specific facts
What are the two components of the Dual-Process Theory.
System 1 and System 2
What is the Availability Heuristic and what is the value behind it?
Reasoning influenced by what comes to mind easily. Events more easily remembered are judged as more probable than those less easily remembered
Value: It’s normally, but not always, right
What is the Conjunction Fallacy?
Reasoning that a conjunction is more likely either premise alone
How can misuse of the Representativeness Heuristic lead to stereotypes and bias?
Can lead people to think their limited experience is representative, that every individual must fit their stereotype for that individual’s group, and ignore other relevant information
Assumption that a sample represents the group
What is Deduction?
Deduction: Drawing specific conclusions from general principles
Compare System 1 vs System 2 processing.
System 1: Fast, automatic, intuitive, nonconscious
System 2: Slow, controlled, reflective, conscious. Can take over when system 1 has an error
What is Anchoring and Adjustment?
When given an anchor value, people tend to guess closer to it
The Conjunction Fallacy comes from a misuse of which heuristic?
A misuse of the Representativeness Heuristic
What is reasoning from an instance to a population vs reasoning from a population to an instance?
Instance -> Population: Assumption that a sample represents the group
Population -> Instance: Assumption that each sample resembles the group