Behavioral Economics: Difference between revisions
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'''Prospect Theory''' | '''Prospect Theory''' | ||
How people make choices under uncertainty | <left>How people make choices under uncertainty </left> | ||
#It is defined over change to wealth rather than levels of wealth to incorporate the concept of adaptation | #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. | #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. | ||
Revision as of 20:23, 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 <left>How people make choices under uncertainty </left>
- 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.
