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| '''Overview''' | | '''Overview''' |
| | | <center> <i> By Matt Walters, Dave Donahoo, Lydia Gray, Luke Volker, Franky </i></center> |
| <center> Economics traditionally conceptualizes the world according to the assumption that the entire population is comprised of equally informed, educated, and equity maximizing individuals (Homo Economicus). It is argued that behavioral and psychological insights could improve the understanding of economic decisions by: 1. Identifying way in which behavior differs from the standard Homo Economicus model, and 2. showing how this behavior manifests itself in economic terms (Mullainathan and Thaler 2) </center> | | <center> Economics traditionally conceptualizes the world according to the assumption that the entire population is comprised of equally informed, educated, and equity maximizing individuals (Homo Economicus). It is argued that behavioral and psychological insights could improve the understanding of economic decisions by: 1. Identifying way in which behavior differs from the standard Homo Economicus model, and 2. showing how this behavior manifests itself in economic terms (Mullainathan and Thaler 2) </center> |
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| == Behavioral Economics Theories ==
| | <center> [[Image:Behavioraleconomicshomepage.gif]] </center> |
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| ===Prospect Theory===
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| ;How people make choices under uncertainty. One needs to understand when indviduals faced with separate gambles treat them as separate gains and losses and when they treat them as one, pooling them to produce one gain or loss.
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| #It is defined over change to wealth rather than levels of wealth to incorporate the concept of adaptation
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| #The loss function is steeper than the gain function to incorporate the notion of "loss aversion"; the notion that people are more sensitive to descreases in their well being than to increases.
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| #Both the gain and loss function display diminishing sensitvity (the gain function is concave, the loss function is convex) to reflect experimental findings.
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| ''Asymmetric Value Function''
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| <center>[[Image:Asymmetric Value Function.gif]]</center> | |
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| ===Rational efficient markets hypothesis===
| | <center> This chart shows word counts using Lexis Nexis of the terms "behavioral finance" and "efficient markets" by year in General News, Major Papers, Full Text, scaled by an estimate of the number of words of text on Lexis-Nexis for the year. The chart shows that "behavioral finance" has been growing exponentially starting from several years after we began our workshop series, while "efficient markets" has been declining. The chart is dramatic evidence that behavioral finance has been gaining in the marketplace for ideas. </center> |
| <i> Finance Economics </i> | |
| #Stock prices are "correct" in the sense that asset prices reflect the true or rational value of the security. (not tested because intrinsic values are not observable)
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| #Upredictability- in an efficient market it is not possible to predict future stock price movements based on publicly available information
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| ===Behavioral Life-Cycle Theory===
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| <i> Savings Economics </i>
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| #People have the temptation to spend more of their income now than in the future.
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| ===Limits to arbitrage===
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| #The price of an asset may not equal its fundamental value – this represents a mispricing. However, this mispricing may persist for long periods of time because arbitraging it away may entail significant risks and costs
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| ===Loss of aversion===
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| | <i> this page designed by Lydia Gray </i> |
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| {{Behavioral Economics Nav Bar}} | | {{Behavioral Economics Nav Bar}} |
Behavioral Economics
Overview
By Matt Walters, Dave Donahoo, Lydia Gray, Luke Volker, Franky
Economics traditionally conceptualizes the world according to the assumption that the entire population is comprised of equally informed, educated, and equity maximizing individuals (Homo Economicus). It is argued that behavioral and psychological insights could improve the understanding of economic decisions by: 1. Identifying way in which behavior differs from the standard Homo Economicus model, and 2. showing how this behavior manifests itself in economic terms (Mullainathan and Thaler 2)
This chart shows word counts using Lexis Nexis of the terms "behavioral finance" and "efficient markets" by year in General News, Major Papers, Full Text, scaled by an estimate of the number of words of text on Lexis-Nexis for the year. The chart shows that "behavioral finance" has been growing exponentially starting from several years after we began our workshop series, while "efficient markets" has been declining. The chart is dramatic evidence that behavioral finance has been gaining in the marketplace for ideas.
this page designed by Lydia Gray
Home Page | History of Behavioral Economics | Basic Concepts | Stock Markets | Gambling and Stocks
| Gambler's fallacy and Law of Small Numbers |Hunting for Homo Sovieticus: Situational versus Attitudinal Factors |
Criticism of Behavioral Economics | Behavioral Economics: Sources
