Behavioral Economics: Difference between revisions
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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. | #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. | ||
#Both the gain and loss function display diminishing sensitvity (the gain function is concave, the loss function is convex) to reflect experimental findings. | #Both the gain and loss function display diminishing sensitvity (the gain function is concave, the loss function is convex) to reflect experimental findings. | ||
<center>[[Image:Asymmetric Value Function.gif]]</center> | |||
'''Rational efficient markets hypothesis''' | '''Rational efficient markets hypothesis''' | ||
#Stock prices are "correct" in the sens that asset prices refelct the true or rational value of the security. (not tested because intrinsic values are not obseravle) | #Stock prices are "correct" in the sens that asset prices refelct the true or rational value of the security. (not tested because intrinsic values are not obseravle) | ||
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{{Behavioral Economics Nav Bar}} | {{Behavioral Economics Nav Bar}} | ||
Revision as of 20:40, 1 May 2007
Behavioral Economics
Overview
Two Components of Behavioral Economics
- Identifying the ways in which behavior differs from the standard model
- Showing how this behavior matters in economic context
Behavioral Economics Theories
Prospect Theory
- 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.
- It is defined over change to wealth rather than levels of wealth to incorporate the concept of adaptation
- 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.
- Both the gain and loss function display diminishing sensitvity (the gain function is concave, the loss function is convex) to reflect experimental findings.
Rational efficient markets hypothesis
- Stock prices are "correct" in the sens that asset prices refelct the true or rational value of the security. (not tested because intrinsic values are not obseravle)
- Upredictability- in an efficient market it is not possible to predict future stock price movements based on publicly available information
