NPR THEORY VS.

REALITY: WHY OUR

ECONOMIC BEHAVIOUR IS NOT ALWAYS
RATIONAL
When crisis hits people usually go into survival mode and then there are other people who
choose their own self-interests over being safe and protecting themselves and others. There
are also people who take advantage of the situation such as hording products and selling for
much higher prices. There are other people who put others first and be selfless. Usually,
people expect others to be selfish.
Richard faller a behavioural economist, Nobel prize winner in economist. Usual economics
assumes that people always act rationally and are completely selfish, he calls those people
ecoms. Mental accounting is when a person has different values of the same amount of
money based on subjective criteria such as bonusses birthday money. People are happier
when you give them a vacation then a bonus cash because people can go to vacation guilty
free. When people get cash bonus, they feel bad about spending that money on themselves
because they would rather spend it on other things.
MARSHAMALLOW EXPERIMENT:
Marshmallow test was when children where told they could get one marshmallow or not eat it
and wait and then get a second marshmallow. Kids start to distract themselves.
People always choose what is best for them that is the economists’ theory and that people
have self-control.
Self-control is work not just something just comes to us, it is work that people must put in
Sam bowls thinks that people think that everyone is selfish and that policies are designed
base don the fact people are selfish.
FIREMEN EXAMPLE:
Firefighters used to have unlimited sick days, but the administration thought that they were
abusing that power because most of their calls would come on Fridays and Mondays, so they
decided that they will now limit their sick leaves and if they exceed the number of sick leaves
their pay will become less. This caused the firefighters to feel as if they were not trustable
because most of them did not call when they were not sick. They were angry and it happened
before Christmas so people during Christmas a bunch of people called during those times and
what happened was their bonus was taken away. Later they realized that when they set a
limited number of sick leaves there were double the amount of people calling in sick
especially during new years and Christmas.
It backfired because the way people started thinking about their sick leave changed, when
there was unlimited they would take sick day when they were actually sick and harmed and
they would take as much as they need to heal, so when the rule changed people would start to
think that the limited amount of days they have they will now use when the year is almost up
if they haven’t used it yet even if they aren’t sick so they can just use of the days they have.
DAYCARE EXAMPLE:
Some parent would come late to pick their kids up from the day care so what happened was
that the day care started to put a fine for the parents who would come late for them to pay
thinking this would lessen the number of late pickups.’ The day-care where there was no fine
it continued as normal but the one where there was a fine the lateness actually doubled this
happened because before the fine you would want to pickup them up for morality but when
there is a price there is no longer that morality you ruin the Moral sentiment- Adam smith
because there is no longer that thinking that there is a problem now its just a fine you have to
pay so it leans on self-interest rather than thinking ethically. When the fine was taken away
the lateness remained the same it used to be an ethical question and then when it become
about buying lateness so when they take it away its like they can come late for free, and it did
not change back to an ethical problem. There is some level of the incentive that will make the
people come late less the more money they fine the less lateness there will be however people
do not want to live in a world with everything have a fine. When money is put on the table
this automatically change the way people think and it moves it to the benefit place of their
thinking and self-interest.
Sam bowls argues that policies that are made to discourage bad behaviour would work
better if it was to encourage good behaviour. The concepts of crowding out and
crowding in.
CHORES EXAMPLE:
His kids would always do work around the house and help when his kids became older, they
wanted money to buy things for themselves so he thought it would be a great idea to put a
price list for all the things they help with. What happened was that they stopped doing work,
what happened was that they enjoyed doing stuff and helping with, it was like an obligation
to help. When there was a payment for it that changed them into thinking that it is a choice
now to work or not work.
Incentives can either crowd in people which will amplify motivation to work more and
have a positive outcome or it will crowd out like his daughters’ chores and make them
do it less or have a negative outcome.
IRELAND EXAMPLS
Ireland wanted to reduce the plastic bags; they made an incentive which was a tiny cost for
the plastic bags. This is different from the day care was because during the day care the
only people who see you picking up your kids late are the other parents who are late
and the teachers and there was no explanation. In Ireland there are other people
watching you and waiting for you to answer to buy the plastic bag, it is a public thing
and Ireland explained how it was a better thing for them to stop using plastic bags since they
are trashing their country and the public part showed disapproval if you bought the bag.
In the end he gives advice that

- People need governments that they trust

- People who trust the scientific advice
- People who want to help each other

Simply relying on self-interest will not help with the situation, covid tells us that we must
reply on other things like communities, obligations we have to each other. Civil societies are
not governmental and is not market things, He gives an example of social distancing this is
not from the market or governmental and that it is from the people wanting to protect
others, so they keep social distancing.
People do care about others; people may care negatively by treating people badly due to
social reasoning. That is the challenge of making the better world.
Economists need to see that people are not just selfish and that they do care about
others and that self-interest is not everything that we are.
INFLATION
Inflation measured the cost of living by looking at the price of goods and services and
sees how it has changed over time. Inflation is also when the prices of goods/services
have gone up and today people compare prices to how much they were a year ago.
Inflation rate is the average increase in prices.
Banks such as the bank of England uses inflation to set the base interest rate, which is the
amount of money, they will charge people to borrow money and how much money they
will give to people who are saving.
CONSUMER PRICE INDEX how much consumers are paying for their goods/services.
(CPI)
CONSUMER PRICES INDEX INCLUDING HOMEONER HOUSING COSTS (CPIH)
RETAIL PRICE INDEX includes the prices of the goods and services and shows how much
they have changed over the years (RPI)
CPI is the most common one that people use to look at the changes and the inflation because
the state benefits and the state pension also rise in line with it
When inflation is too high, or it is changing a lot the bank of England says that this makes
it harder for businesses to set the right prices for people which this affects the people who
now are not able to plan how much they will spend.
For borrowers’ inflation can help reduce their debt if they are in a repayment plan such
as fixed rate mortgage.
Inflation affects negatively on savers because now their cash may not stretch as far in
the future since stuff costs more.
Higher inflation also leads to people needing higher salaries because the cost of living is now
much higher.
BASE RATE is the countries borrowing rate and the rate of how much a bank lends to other
banks. Base rates affect the mortgage rates, credit cards, loans, and savings. It was stuck at
the lowest level for a decade because of the financial crash.
HYPERINFLATION is when interest rates go up too fast. This could happen when a
government prints more money which makes prices go up much higher since now there is
more money. This happened to Germany when they printed more money to pay back their
debts in WW1 this caused the currency to lose value and for the people to suffer.
Hyperinflation is difficult to recover from. Some countries must get rid of their currency if
the inflation gets too much.
Low and stable inflation is particularly good since prices will drop making cash go further
and the interest you have to pay goes up above the inflation rate. However too low of an
inflation will cause people to stop their spending since they expect prices to drop lower, if
people stop spending this could cause unemployment and companies failing.
BEHAVIORAL ECONOMICS IN
EVERYDAY LIFE
There are factors that affect our everyday life choices and decisions, but we do not even
realize it.
Behavioural economics is the study that joins together psychology and economics the
definition given is “Relates to the economic decision-making process of the individual and
institutions’:
Behavioural economic principles affect our lives and when we recognize it, we can shape our
own reality.

PLAYING SPORTS
Principle is HOT-HAND FALLACY this is when a person has a belief that when they
succeed with a random event, they have a greater probability of succeeding in additional
attempts.
When a basketball played keeps making their shots, they say they have hot hand, and they
cannot miss
The relation to BE is that out judgement and perception on things can get clouded by
false signals the player does not have hot hand that just have luck.

TAKING AN EXAM
Principle is SELF-HANDICAPPING this is a strategy people use to avoid effort to
prevent damage to their self-esteem,
When a student does badly, they will just say they barely revised or studied as an excuse even
though they did study a lot, but they just say they did not revise a lot or study to not hurt their
ego.
The relation to BE is that people put obstacles in their own paths to manage future
explanation for why they succeed or fail.

GRABING COFFEE
Principle is ANCHORING this is the process of planting a though in a person’s mind that
will later influence their decisions
Starbucks makes themselves different from dunking through their names and their store. This
is what made Starbucks overcome Dunkin and pay more for their things.
Relation to BE is that Starbucks coffee is more expensive than Dunkin’s however
“loyal” Starbucks costumers who are conditioned to think Starbucks is better and
different are willing to pay the inflated price even though the coffee is the same.
PLAYING SLOTS
Principle is GAMBLERS CONCEIT this is when a person has this huge belief that they
can stop the risky game while they are still playing it,
When a gambler says they will stop the game when they win, or they can quit when they
want to at the roulette table or the slot machine, but they do not stop
Relation to BE Players keep playing because they have an incentive to either keep their
streak or win back the money they have lost; they keep engaging in this risky behaviour
against what is in their best interest.

TAKING WORK SUPPLIES

Principle RATIONALIZED CHEATING is when the individual rationalize cheating,
so they do not think they are a bad person.
A person takes supplied from work than the equivalent amount of money in cash
Relation to BE people are more likely to rationalize their behaviour by framing it as if
they are “taking something then they are stealing it when people gain a psychological
distance from their actions them wanting to cheat will increase.

SUMO WRESTLERS AND TEACHERS

In day care centres, parents sometimes arrive late to pick their children up. Economists have
studied this problem and proposed that day care centres fine late parents (since it costs extra
money to take care of children while they’re waiting for their parents to arrive). Strangely,
however, when day care centres adopted such a policy, late arrivals went up, not down. How?
In order to understand the day care problem, the authors say, we’ll need to think carefully
about incentives. Economics is largely the study of how incentives drive human behaviour.
In simplest terms, an incentive is “a means of urging people to do more of a good thing
and less of a bad thing”. There are two kinds of incentives: positive and negative
(“carrots” and “sticks”). Some incentives are biological; for instance, we instinctively pull
our hands away from a hot flame (a negative incentive). But most incentives have to be
created artificially; this means that incentives are always changing. For example, by fining a
big company for polluting the environment, the government could incentivize the company to
decrease its pollutions (another negative incentive). Another way to classify incentives is to
label them as economic, social, or moral incentives. A government plan to fine smokers
would be an economic incentive to reduce smoking. Now the authors apply the three forms of
incentives to crime. At some point, everyone has an opportunity to steal, cheat, or
otherwise break the law. The reason more people don’t commit crimes is partly
economic people are frightened of going to jail and losing their jobs and incomes. The
incentive is also moral people think crime is wrong. There’s also a strong social
incentive: people don’t want to be caught committing a crime and humiliated in front of
their friends or peers.
The second distinction that the authors make is a distinction between economic, moral, and
social incentives.. in other words, the authors aren’t suggesting that humans always put
economics above morality.
In terms of incentives, the problem with the day care centre’s system of fining adults was that
the fine the day care centre proposed, three dollars, was not big enough. If the fine had
been one hundred dollars, it probably would have convinced some late parents to arrive
on time. But there’s another interesting problem with the fine: by fining late parents,
the day care centre replaced a moral incentive with an economic incentive. In other
words, parents who would ordinarily feel the moral guilt of being late to pick their
children up could rationalize their lateness by paying a small fine to the day care centre,
thus freeing themselves from their guilt for a small monetary fee.
BLOOD DONER EXAMPLE:
Doctors discovered that when people are paid for donating blood, less blood is donated
overall. The problem with the blood donation incentive program was that it paid a small
amount of money (less than fifty dollars) for an action that most people take for moral
reasons.
In this case, blood donors started out by acting for moral reasons, but eventually acted
for economic reasons. the fifty-dollar bonus tarnished the blood donation process with
self-interest.
TAXPAYER EXAMPLE:
taxpayers who listed a dependent child to provide a social security number for each child.
Seven million supposed “child dependents” disappeared from tax forms, suggesting that
millions of people had cheated on their taxes, falsely claiming they had children.
TEACHER EXAMPLE:
The biggest cheaters of all might be teachers, not students. Schools measure students’ success
for each school year; if students don’t succeed on their tests, the students’ teachers may be
punished but if students performed well teachers would receive raises and promotions. This
createsnew economic incentive for teacher cheating.
While a teacher who falsifies test scores might not be a very good teacher, he or she is simply
responding to an economic incentive.
One common way for a teacher to cheat on student tests would be for the teacher to add
correct answers to the end of a student’s test (i.e., the part of the test where incorrect answers
are most common.
This was caught when they indicated that an unexpectedly high number of students in certain
classes “choose” the same correct answers for the final ten questions on federal tests—the
questions that should be the hardest.
This time, teachers weren’t allowed to be in the room with their students when they were
tested or handle their students’ tests. When the results came in, students did worse on their
tests than they’d done originally: without teachers to help them cheat, the students didn’t
succeed. Duncan publicized news of the cheating study, hoping that the news would act as a
warning to teachers next year. Sure enough, cheating fell 30 percent the next year.
Duncan was able to
1) identify that cheating was, indeed, occurring in Chicago classrooms
2) use his influence, and the influence of his study, to reduce cheating the next year.
Sports and cheating “go hand in hand.” Athletes have a huge economic, social, and even
moral incentive to win.. If a wrestler wins more than half of his matches his ranking rises; if
not, it goes down.
For this reason, a wrestler’s eighth match is especially important in determining his rank. In
terms of incentives, a wrestler with a 7-7 record has much more to gain from a victory than
does an opponent with an 8-6 record. So, it’s possible that in tournaments, wrestlers with 8-6
records will allow opponents with 7-7 records to win.
it seems almost impossible to measure whether sumo wrestlers’ cheat: sumo wrestling is such
an unpredictable sport that it would be difficult to separate legitimate matches from rigged
matches.
A 7-7 wrestler will have a very strong positive incentive for winning a match
An 8-6 wrestler will have a smaller incentive.
An 8-6 wrestler has a strong incentive for accepting a bribe and very little
BAGELS GUY
Feldman was famous for being “the guy who brings in the bagels.” Feldman always made a
point of bringing bagels to work. Years later, Feldman decided to quit his job and “bring
bagels” full-time. Feldman would travel to hundreds of companies and bring fresh
bagels. he would come back to companies in the afternoon to see if anybody had eaten a
bagel and left some money. Amazingly, Feldman made a healthy living bringing bagels
to workers.
As a “bagel guy,” Feldman would personally go to different companies. Sometimes, he
would find that people hadn’t obeyed the honours system and had eaten bagels without
paying for them. Sometimes, Feldman would leave collection boxes at his various
companies, and come back to collect the boxes later. Although company employees
would occasionally eat bagels without paying for them, very few people would steal the
collection boxes themselves.
People will occasionally “cheat” by eating bagels without paying, and yet they will
almost never steal entire boxes of money, despite the fact that their economic incentive
for stealing boxes is much greater than the economic incentive for stealing one bagel.
Feldman’s example tells us a lot about what’s usually called “white-collar crime.” White-
collar crime is relatively rarely prosecuted, and often unsolved, So perhaps “bagel
theft” could be used as a measure of white-collar crime in a business setting.
Feldman has also observed that smaller businesses tend to be more honest than large
ones. the bagel data suggests that one’s personal mood correlates with one’s likelihood
to commit a crime. Pleasant weather often correlates with a higher payment rate. The
Christmas holiday correlates with a lower payment rate, while other holidays, like the
4th of July, correlate with a higher pay rate.
Adam Smith, Smith posits that humans are innately honest; by default, they care about
helping other people and making others happy. Feldman’s data suggests that most of the
time, human beings will be honest, suggesting that Smith was right about human nature.
Who pays for your coffee?
Harford first asks the reader to think about why big businesses, such as
Starbucks, whose product is relatively simple, can profit so heavily. The
main reason for this, states Harford, is the location of said businesses. By
placing themselves in busy settings with commuters who are in a time
crunch, it allows Starbucks to earn a considerable profit. Harford brings up an
economic model published in 1817 by a British economist, David Ricardo, whose goal was to
understand what had happened to Britain’s economy during the Napoleonic wars. Hartford
uses an example from Ricardo’s book about a wild frontier which has
plenty of fertile land available to grow crops, and only a few settlers.
Because there are so few settlers, landlords cannot charge a price too high.
However, when more and more aspiring farmers start coming to settle on
the land, landlords can drive up the price. Once there is almost no land left,
the price can skyrocket because settlers are willing to pay whatever they
want to get a piece of land. This is an example of bargaining strength and
scarcity.. Harford also addresses people being ripped off by big businesses, and the topic of
of competition,

that bargaining strength comes through scarcity. Bargaining shifts when relative scarcity
shifts from one person to another. The example Harford uses is one from David Ricardo
economics book, published in 1817. He explains that as more aspiring farmers come for
meadowland, the amount of available meadowland decreases. Due to the fact that the
meadowland is the only land that is extremely good for farming, aspiring farmers are willing
to pay any price to have a current farmer evicted so they can take their land. But the current
farmers want the land too, so they are willing to pay anything to stay on their land. This gives
the bargaining power to the landlords because there are so many farmers available, and so
little meadowland available. Harford transfers this idea back to current times where
businesses want their stores to be in the best possible locations in order to make a high profit.
Hartford uses the example of coffee shops. There are so many coffee shops available, and not
enough profitable locations, that people are willing to pay a high price to get a location that
will benefit them the most. This is how scarcity power works. In addition, many places have
a high rent because the best land produces more when compared to the marginal land.
The marginal land is the margin between being cultivated and not being cultivated, as.
There are many factors that can drive up prices of land. Harford states that if a product a
company is selling is expensive, then the land that product is being sold on will also be
expensive. Green belts drive up the prices of land because green belts are
broad areas of land around a city that are illegal to develop property on.
The rent determined in the city is set by the difference between how productive the city is,
and how productive the marginal land is. If you make it illegal to live somewhere, then the
price of the places you can live, and work will rise because it is the only choice people have.
Scarcity power is also related to the cur/.rent job market. Harford explains
that if the country is low on people who have certain skills, or degrees, then
they will be paid rightly so for their scarcity value. This is why people with
high degrees are paid good money for the degrees and skills they have. It
provides you with scarcity power.
Actions speak louder than words
Principle of revealed preference is that value is value to us, revealed not by
words but by actions.
People might say they value something but if their actions do not prove it then
in reality they do not value that thing high enough.
For example, in the joke the author says when one economist says I want that
and the other says obviously not this means that it isn’t a want since they do not
have what they want.
There is always a choice, people always make choices. Every decision is an
effect from a choice made.
Poor people make choices whether to eat or go to the doctor, this may seem like
a necessity however it still is a choice being made.

Price theory an economic theory that states that the price for any
good or service is based on the relationship between its supply
and demand.
Naïve price theory is when people make assumptions about the
outcome of prices or situations
Examples:

Rental contracts: A law is made that landlords have to give 6 months’

notice before kicking a tenant out. This causes an issue for the landlord since
now they cannot kick bad tenants out faster. An assumption is made that the
prices wont change because of this law because why should it? There is no
correlation however this assumption is false. Landlords will raise the prices
since now their operating cost will be higher because bad tenants will stay
longer, and they must make the place more attractive so better tenants move in.

Lightbulb example: A company which has a monopoly on the lightbulb

industry created a new lightbulb that works ten times longer, this means they
will be selling less lightbulbs than before because people will not have to rebuy
the product. People assume that the company will be selling this bulb for the
same price as the ones they had however this assumption is false because people
who are willing to pay multiple times for new lightbulbs are willing to pay
higher for the new ones since they will have to purchase it sell.
Invisible hand is that the market adjusts the price based on the supply and
demand of it and this is sort of like an invisible hand adjusting the prices.
The Opportunity Cost of Economics Education
The author starts out by talking about how many students who take a course in economics
come out learning nothing and that their knowledge a couple months later will be the same
amount of knowledge a person who has never taken economics has. The main issue is that
these types of courses focus on the mathematical and graphs that may cause the students to be
unmotivated ands they do not learn the basic economic principle.
The principle that many fail to teach students is the cost benefit principle/opportunity cost
principle. Opportunity cost principle talks about the cost involved in any decision consists
of the sacrifices of alternatives required by that decision. If there are no sacrifices, there is no
cost. Which is explicit- implicit. If you attend the free concert, you lose the 10 dollars you
could have saved from going to the bob Dylan. If you attended the bob Dylan it will again be
10 dollars because you are not losing any money from going to the free concert.
Gender Trade-Offs
Trade-off is when someone makes an exchange by choosing one thing and losing
something else. Women make gender trade offs by choosing to get a higher education rather
than getting married. College-educated women seem better positioned than other women.
High earnings make them attractive to potential marriage partners and improve their
bargaining power, which helps them persuade men to take on more responsibilities for
family care. Men experience a different, often less costly trade-off: Becoming a parent
typically leads them to increase their hours of market work. They give up some leisure and
some family time, but their earnings go up, along with their lifelong career prospects. Places
will decrease the amount they pay women because that means they will pay less for the same
work done.

Educated women have a bargaining power not only in their person

marriage life but also in the workplace since they can bargain to be paid
the same amount as a man because of their education because the same or
higher.
The Economics of Happiness
“happiness" to mean a short-term state of mind that may depend on a person's temperament,
but also on external factors, such as whether it is a sunny or rainy day. They use "life
satisfaction" to refer to a longer-term state of contentment and well-being.
Money for example bring you short term happiness and short-term satisfaction. The example
given was if someone won the lottery, they would be so happy in the moment but later when
they become used to the feeling they want more.
Eastelirn said that wealthier people in any country are to the ones that say they are happier
with their lives rather than the poor people in the same country. Easterling also found that
when countries get richer the people do not become happier and this goes back because
people don’t focus on the amount, they have they compare themselves with others because
they want to have more.

The Easterlin Paradox states that at a point in time happiness varies directly with
income, both among and within nations, but over time the long-term growth rates of
happiness and income are not significantly related.

Factors of happiness:
happy people tend to spend time with friends and family and put emphasis on social and
community relationships. We are social creatures. Research has demonstrated that happiness
and life satisfaction are more closely related to participating meaningfully in a network of
friends, family, and community than any other factor.
Another factor in happiness, perhaps less obvious, is based on the concept of "flow."12 When
you are working, studying, or pursuing a hobby, do you sometimes become so engrossed in
what you are doing that you totally lose track of time? That feeling is called flow. If you
never have that feeling, you should find some new activities--whether work or hobbies.
Another finding is that happy people feel in control of their own lives. A sense of control can
be obtained by actively setting goals that are both challenging and achievable. Though, there
are many things in our lives we cannot control. So, it also is important to recognize what is
and is not within our control, to cultivate the flexibility to accept unexpected change with
equanimity, and to focus our efforts on achieving goals at the limit of, but still within, our
reach.
happiness can be promoted by fighting the natural human tendency to become entirely
adapted to your circumstances. One interesting practical suggestion is to keep a "gratitude
journal," in which you routinely list experiences and circumstances for which you are
grateful.13 Devices like gratitude journals help people remain aware of the fortunate aspects
of their lives, offsetting the natural human tendency to take those things for granted after a
while.
Why economics need data
Economics need data to justify their claims and back up their theories to be
believed by the people. When economists do not have data, they cannot
compare their findings. Data helps compare the present and the past by using
past data people now can see how much economist have grown and become
better or have lost their value. It can help have a better-informed discussion.
PowerPoint Inflation
Why popcorn costs more at the movies
The author states that the usual answer is that movie theatres have a monopoly
since that when you enter one the stand is the only way for you to get your
candy, therefor they have a monopoly which makes them have any price they
want. The author says this isn’t true since if they had a monopoly, they would
be charging for much more things they provide
Monopoly: the exclusive possession or control of the supply of or trade in a
commodity or service they have a market power which measn they can change
and set the price/quantity. You cant change both price and quantity at the same
time you decide on one at a time.
He gives an argument about raising movie ticket prices however making the
popcorn much cheaper which causes people to buy much more popcorn, but this
may attract popcorn lovers, but it will also drive away movie goers and the
point of a movie theatre is to provide for movie goers.

Reservation price is the most amount a person is willing to pay for

something.
Producers want to match the persons reservation price and a set a price that if
someone loves popcorn, they would be willing to pay that amount at movie
theatres.
Printing discount coupons on newspapers aren’t made to lure in customers but
are used to lure in a certain class of customers.
Price discrimination is when the same product is sold at more than one
price.
Later in the story the author talks about economists Luis locay and Alvaro
Rodriguez talked about how people go to movie theatres in groups and how
they cannot split up their group that consists of no popcorn lovers and popcorn
lover just because another movie theatre offers popcorn for less but tickets for
more.