I think we can come to some agreements now that there are many human (and economic) behaviours that standard economic models cannot predict. To name but a few of the new behavioural economic theories:i) Endowment effect: A hypothesis that people value a good or a service more once their property right to it has been established.
Is there an example of that?: An experiment involved students and coffee mugs. A group of students were given a coffee mug each before entering a lab. After conducting a radio interview as part of the experiment, each student was asked how much they would be willing to accept a in terms of money for the coffee that was given to them an hour earlier. On the other hand, another group of students were not given a coffee mug before the radio interview. However, they were asked afterwards how much are they willing to pay for a coffee mug (the same design as those ones given to the first group of students).
The researchers find that the willingness to accept for the coffee mug is significantly higher than the willingness to pay specified by students in the other group.
What does standard economic theory predicts?: For the same coffee mug, the willingness to accept and the willingness to pay should be exactly the same.
Who are the leading researchers in this field?: Richard Thaler at Chicago; Dan Ariely at MIT
ii) Loss aversion: The hypothesis that people prefer avoiding losses than aquiring gains.
Is there an example of that?: A sample of randomly selected individuals are asked the following question:
"Imagine that your country is preparing for an outbreak of a disease which is expected to kill 600 people. Given the choice between two vaccination schedules, Program A which will save 200 and Program B which will save all 600 with probability 1/3, which program would you choose?"
If you're like most people, you would probably choose Program A.
However, if we rephrase the question to:
"Imagine that your country is preparing for an outbreak of a disease which is expected to kill 600 people. Given the choice between two vaccination schedules, Program C which will allow 400 people to die and Program D which will let no one die with probability 1/3 and all 600 will die with probability 2/3"
If you're like most people, you would probably choose Program D.
This is an example of loss aversion: The two situations are identical in quantitative terms. However, in the second one the decision maker is losing instead of saving lives, thus setting 0 lives lost as the status quo from which losses are measured, making the sure loss of 400 people more loathsome than the probable loss of 600.
What does standard economic theory predicts?: The decision should be the same if the two situations are identical in quantitative terms.
Who are the leading researchers in this field?: Daniel Kahneman at Princeton
iii) Anchoring (and focusing) effect: A hypothesis that people tend to rely heavily, or "anchor", on one trait or piece of information when making decisions.
Is there an example of that?: When people from California and Midwest are asked "Who do you think are happier - people living in California or people living in the Midwest?", both groups think people living in California are much happier than people in the Midwest. However, when they are asked to respond how happy they are with their life, it turns out that their mean happiness levels are exactly the same.The reason for the misprediction is that when they are asked to make a joint evaluation between California and Midwest, the only salient difference between the two places is the weather. In other words, their attention is focused or anchored on the difference in weather. However, when they are asked about what makes them happy - other things like marriage life, income, job, etc. matter a lot more to them than the weather. Weather, in fact, doesn't enter their well-being function at all.
What does standard economic theory predicts?: Stated preference (a decision utility) should be the same as true preference (an experience utility)Who are the leading researchers in this field?: Daniel Kahneman at Princeton, David Schkade at Rady School, San Diago
