Introduction

1. Syllabus
2. Why Behavioral Economics
3. Traditional Economics vs.
Behavioral Economics
行为经济学代表人物
 Bananas Vomit
 System 1 operates automatically and quickly, with little or no
effort and no sense of voluntary control.
System 2 allocates attention to the effortful mental activities
that demand it, including complex computations. The
operations of System 2 are oftenassociated with the subjective
experience of agency,choice, and concentration.
 Traditional Economics vs. Behavioral
Economics

• > Within traditional economics, individuals are assumed to be

rational,expected value oriented and risk-averse. Traditional
economics further hypothesizes that, at the market level, prices
incorporate and reflect all available and relevant information.
• > Behavioral economics includes behavioral economics. Investor
psychology, behavioral science, experimental economics, and cognitive
psychology.
Financial times experiments
Utility theory
• To maximize utility, a rational peoson will make decisions
conforming to the four axioms of utility: completeness,
transitivity, independence, and continuity.
•• Completeness: Choices and preferences are known.
• ^ The individual is aware of all available choices and can
value and assign preferences to each, such that between
any two choices, the individual prefers one over the other
or is indifferent between them.
• For example if you prefer baijiu to beer we
would write baijiu＞ beer if you always prefer
baijiu to beer or baijiu ≥ beer if baijiu is at
least aspreferable to beer. If you simply are
indifferent between the two we would use the
following∼.
Definition

• 1. Completeness: for all x, y ∈ X, we

have that x ≥ y or y ≥ x or both.
• 2. Transitivity: for all x, y, and z ∈ X, if
x ≥ y and y≥z, then x≥ z
Completeness and violation of
completeness

• Completeness simply implies that you do

indeed possess the ability to choose. If
given all the choices you as a rational
person can always decide your preference
without confusion.
Transitivity and violation of transitivity

• Transitivity states that if you prefer bananas

over dragon fruit and you prefer dragon fruit
over vegetables that you necessarily prefer
bananas over vegetables.
example

• Imagine you are about to purchase a cell

phone for 7000 Y and a nice bottle of
baijiu for 300Y
Senario 1

• The store owner tells you that the cell phone is

30 Y cheaper at a store that is 20 minutes
away. The baijiu is unfortunately the same
price at both locations. Would you make the
trip?
Senario 2

• The store owner tells you that the baijiu is 30

Y cheaper at a store that is 20 minutes away.
The cell phone is unfortunately the same price
at both locations. Would you make the trip?
 • x = Travel to the other location and get a 30 Y
discount on the cellphone.
 • y = Travel to the other location and get a 30 Y
discount on the baijiu.
 • z = Purchase both items at the first location.
Classic economic individual decision
making 2 Condorcet’s Paradox
Utility Theory

• > Independence: Utilities are additive and divisible.

• • Adding choice Z to both X and Y will not affect the
preference ranking of X and Y. If, for example, the
investor prefers X to Y and we add Z to both choices,
the investor will prefer (X + Z) over (Y + Z).
• >
• Also, assuming the investor prefers X to Y, if any
portion, p, of Z is added to X and X the investor's
preference ranking does not change. The investor will
prefer (X + pZ) to (Y + pZ).
• • If the ranking is based on the size of the
proportion, the choices are not independent
Allais’ paradox
• Continuity: Indifference curves are smooth and unbroken.
•• Assume there are three choices, L, M, and N, such that
the investor prefers L to M and M to N. There must be a
combination of L and N (portions a and b) that makes the
investor indifferent between (aL + bN) and M.
•• This ensures that indifference curves are unbroken (i.e.,
continuous).