1. Define Behavioral Economics. Explain two reasons why individual behavior may
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Question
1. Define Behavioral Economics. Explain two reasons why individual behavior may deviate from the predictions of traditional economic theory. 2. Explain the following two concepts: decision utility and experienced utility. Discuss why experienced utility and decision utility may fail to coincide. List at least two ways to measure experienced utility 3. Briefly explain the DRM discussed in class. What are the advantages of this method compared to other methods used in the previous studies? 4. The efficient market hypothesis predicts that the future returns on the two portfolios, the Winners and the Losers, should be the same since you are not supposed to be able to predict changes in stock prices from past returns." Thaler (2018) mentioned that he and his coauthors had a different prediction. What was their prediction? Explain the rationale behind their prediction. 5. Use a graph to show the utility function for a risk-loving individual. Is the expected utility smaller than the utility of expected value for this individual? Justify your answer using a graph. 6. Explain prospect theory. Use an example to illustrate one implication of the theory. Some claims that people can be extremely risk averse so that they value a risky prospect less than the prospect's worst possible outcome based on prospect theory. Is that right? Justify your answer. 7. Define the uncertainty effect (UE). What are the three possible reasons for the UE? Simonsohn (2009) examined the rationale behind the UE using experiments. Summarize the findings from the experiments.Explanation / Answer
1) The study of psychology based on economic decision making of individuals and firms is called behavioral economics. It is an economic analysis method that uses psychology with human behavior to study economic decision making.
Individuals make choices that maximize their indiviudla satisfaction and benefit. So they can make irrational decisions and can be incapable of making good decisions in some cases. They always prefer their own individual benefits and is moved by emotions and ther external factors. They are not always self controlled. Their behaviors may not follow predictions of economic models.
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