- •Brief Contents
- •Contents
- •Preface
- •Who Should Use this Book
- •Philosophy
- •A Short Word on Experiments
- •Acknowledgments
- •Rational Choice Theory and Rational Modeling
- •Rationality and Demand Curves
- •Bounded Rationality and Model Types
- •References
- •Rational Choice with Fixed and Marginal Costs
- •Fixed versus Sunk Costs
- •The Sunk Cost Fallacy
- •Theory and Reactions to Sunk Cost
- •History and Notes
- •Rational Explanations for the Sunk Cost Fallacy
- •Transaction Utility and Flat-Rate Bias
- •Procedural Explanations for Flat-Rate Bias
- •Rational Explanations for Flat-Rate Bias
- •History and Notes
- •Theory and Reference-Dependent Preferences
- •Rational Choice with Income from Varying Sources
- •The Theory of Mental Accounting
- •Budgeting and Consumption Bundles
- •Accounts, Integrating, or Segregating
- •Payment Decoupling, Prepurchase, and Credit Card Purchases
- •Investments and Opening and Closing Accounts
- •Reference Points and Indifference Curves
- •Rational Choice, Temptation and Gifts versus Cash
- •Budgets, Accounts, Temptation, and Gifts
- •Rational Choice over Time
- •References
- •Rational Choice and Default Options
- •Rational Explanations of the Status Quo Bias
- •History and Notes
- •Reference Points, Indifference Curves, and the Consumer Problem
- •An Evolutionary Explanation for Loss Aversion
- •Rational Choice and Getting and Giving Up Goods
- •Loss Aversion and the Endowment Effect
- •Rational Explanations for the Endowment Effect
- •History and Notes
- •Thought Questions
- •Rational Bidding in Auctions
- •Procedural Explanations for Overbidding
- •Levels of Rationality
- •Bidding Heuristics and Transparency
- •Rational Bidding under Dutch and First-Price Auctions
- •History and Notes
- •Rational Prices in English, Dutch, and First-Price Auctions
- •Auction with Uncertainty
- •Rational Bidding under Uncertainty
- •History and Notes
- •References
- •Multiple Rational Choice with Certainty and Uncertainty
- •The Portfolio Problem
- •Narrow versus Broad Bracketing
- •Bracketing the Portfolio Problem
- •More than the Sum of Its Parts
- •The Utility Function and Risk Aversion
- •Bracketing and Variety
- •Rational Bracketing for Variety
- •Changing Preferences, Adding Up, and Choice Bracketing
- •Addiction and Melioration
- •Narrow Bracketing and Motivation
- •Behavioral Bracketing
- •History and Notes
- •Rational Explanations for Bracketing Behavior
- •Statistical Inference and Information
- •Calibration Exercises
- •Representativeness
- •Conjunction Bias
- •The Law of Small Numbers
- •Conservatism versus Representativeness
- •Availability Heuristic
- •Bias, Bigotry, and Availability
- •History and Notes
- •References
- •Rational Information Search
- •Risk Aversion and Production
- •Self-Serving Bias
- •Is Bad Information Bad?
- •History and Notes
- •Thought Questions
- •Rational Decision under Risk
- •Independence and Rational Decision under Risk
- •Allowing Violations of Independence
- •The Shape of Indifference Curves
- •Evidence on the Shape of Probability Weights
- •Probability Weights without Preferences for the Inferior
- •History and Notes
- •Thought Questions
- •Risk Aversion, Risk Loving, and Loss Aversion
- •Prospect Theory
- •Prospect Theory and Indifference Curves
- •Does Prospect Theory Solve the Whole Problem?
- •Prospect Theory and Risk Aversion in Small Gambles
- •History and Notes
- •References
- •The Standard Models of Intertemporal Choice
- •Making Decisions for Our Future Self
- •Projection Bias and Addiction
- •The Role of Emotions and Visceral Factors in Choice
- •Modeling the Hot–Cold Empathy Gap
- •Hindsight Bias and the Curse of Knowledge
- •History and Notes
- •Thought Questions
- •The Fully Additive Model
- •Discounting in Continuous Time
- •Why Would Discounting Be Stable?
- •Naïve Hyperbolic Discounting
- •Naïve Quasi-Hyperbolic Discounting
- •The Common Difference Effect
- •The Absolute Magnitude Effect
- •History and Notes
- •References
- •Rationality and the Possibility of Committing
- •Commitment under Time Inconsistency
- •Choosing When to Do It
- •Of Sophisticates and Naïfs
- •Uncommitting
- •History and Notes
- •Thought Questions
- •Rationality and Altruism
- •Public Goods Provision and Altruistic Behavior
- •History and Notes
- •Thought Questions
- •Inequity Aversion
- •Holding Firms Accountable in a Competitive Marketplace
- •Fairness
- •Kindness Functions
- •Psychological Games
- •History and Notes
- •References
- •Of Trust and Trustworthiness
- •Trust in the Marketplace
- •Trust and Distrust
- •Reciprocity
- •History and Notes
- •References
- •Glossary
- •Index
INDEX
A
Absolute magnitude effect, 331–336 Absolute risk aversion, 131 Accounts, 62–64
Acquisition utility, 25, 55 Addiction, 146–149
projection bias and, 290–292 Additive model, 284 Adjusting
mechanism, 73
winner’s curse and, 110–117 Ainslie, G. W., 318–319, 343 Akerlof, G., 378
Ali, M. M., 264
Allais, P. M., 230–231, 233, 246–247 Allais’ paradox, 231
Alpert, M., 200–201
Altruism, 389–416 impure altruism, 411
public goods provision and altruistic behavior, 409–413
rationality and, 392–397 Ambiguity, 215
ambiguity aversion, 241–246 Anchoring
mechanism, 73
winner’s curse and, 110–117 Anderson, D. C., 181 Andreoni, J., 395–397, 400–401 Anomaly, behavioral, 1
Ariely, D., 72, 74, 98, 307, 360 Arkes, H. R., 23–24, 57, 65 Asymmetric elasticity condition, 337
Auctions/Auction behavior, 93–121, See also Bidding; Rational bidding in auctions; Winner’s curse
common-value auction, 106 uncertainty in, 106–107
Availability, 156–186
B
Babcock, L., 209 Backward induction, 350 Banaji, M. R., 462 Baraji, P., 100
Baratta, P., 237 Barber, B. M., 205 Barberis, N., 138 Barney, J. B., 202, 204 Base rate neglect, 165 Base rate, 165–166
‘Battle of the Sexes’ game, 429 Bayes’ rule, 160, 172
Bayesian Nash equilibrium, 119–121 Bazerman, M. H., 114–115
Becker, G., 293
Behavioral bracketing, 149–150 rational explanations for, 151
Behavioral model, 9 advantages, 9 downfall of, 9
Benartzi, S., 135–136, 360
Benzion, U., 326, 331, 333 Berg, J., 451
Bernoulli, D., 216
Bertrand, M., 182 $-Bet, 219
Betweenness axiom, 234–235
Bias, 167–169, 181–183, 207–208, See also Confirmation: bias; Self-serving bias
conjunction bias, 167–169
495
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496 |
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INDEX |
Bickel, W. K., 335
Bidding, 93–121, See also Auctions/Auction behavior; Rational bidding in auctions
heuristics and transparency, 99–100 incremental bidding behavior, 98 uncertainty in, 119–121
Bigotry, 181–183
Binomial probability function, 157 Birnbaum, M., 220
Bliss point, 20 Blume, L. E., 13 Blumer, C., 23–24, 57 Bogan, V., 197
Bounded rationality, 8–10 modeling, 8–10
behavioral model, 9 procedural rational model, 9
Bracketing, 125–155
addiction and melioration, 146–149 adding up, 145–146
behavioral bracketing, 149–150 rational explanations for, 151 changing preferences, 145–146
choice bracketing, 145–146 history, 150
narrow bracketing and motivation, 149 narrow versus broad bracketing, 135–139 portfolio problem, 139, 154–155
risk aversion, 140–143 utility function, 140–143 and variety, 144
rational bracketing for, 144 Broad bracketing, 135–139 Brockhaus, R. H., 202 Budgets, 46, 62–64
budgeting bundles, 49–52 nonoptimality between, 50
Burnham, T. C., 405 Busenitz, L. W., 202, 204
C
Calibration exercises, 162–164
Camerer, C. F., 148, 202, 204, 211, 236, 304 Campbell, W. M., 109, 116
Cancellation, 257–258 Capen, E. C., 100
Carter, M. R., 413, 458–459 Cassing, J., 110
Castillo, M., 413, 458–459
Causal relationship establishment, experiments in, 12 Centipede game, See Take-It-or-Leave-It game Certainty, 231
certainty effects, 231–234, 238, 259 certainty equivalent, 128
in multiple rational choice, 126–133 Chambers, V., 52
Chan, K. S., 411 Cheap talk, 455 Chen, K., 82
Choice bracketing, See Bracketing Clapp, R. V., 100
Closing accounts, 57–60 Coding, 257
Coefficient of ambiguity aversion, 244 Cold state, 297
Combination, 257
Committing/Commitment mechanisms, 347–385 choosing when to do it, 361–368
independence of irrelevant alternatives, 362 possibility of, 348–351
rationality of, 348–351
recursive optimization problem, 348 under time inconsistency, 351–360
Common difference effect, 330–331 Common outcome effect, 231 Common-value auction, 106 Competitive marketplace
holding firms accountable in, 425–427 demand shifts, 426
quality differences, 426 Complete preference, 3 Completeness, 392 Compound gamble, 132, 226 Compte, O., 209
Concavity, risk aversion and, 254 Concorde paradox, See Sunk cost fallacy Conditional probability function, 161 Confidence interval, 158
Confirmation, 187–213 bias, 192–203
conditions leading to, 193
Rabin and Schrag’s model of, 196
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Index |
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497 |
|
Confirmatory information, 192 Confirming forecast, 190 Conjunction bias, 167–169 Conlin, M., 296
Conservatism versus representativeness, 178–179 Constant additive loss aversion, 81
Constant loss aversion, 80
indifference curves shape with, 91–92 Constant sensitivity, 80
Consumer preferences in reference, transaction utility and, 34–35
Consumer pricing, 17–40 Consumer problem, 77–81 Consumption bundles, 49–52 Consumption smoothing, 317
Contextdependent preferences, rational explanations for, 36–37
Continuity axiom, 217, 249
Continuous choice problem with backward induction, 381–385
Continuous time, discounting in, 312–313 Contrapositive statements, 191 Convexity, risk loving and, 254 Cost–benefit analysis, 17
Cox, J. C., 104
Credit card purchases, 55–57 Croson, R., 177
Cross, M. L., 181 Crowding-out effect, 411 Cruelty, 428
Cumulative prospect theory, 259
in Marschak–Machina triangle, 263 probability weighting under, 262 value function under, 261
Curse of knowledge, hindsight bias and, 303–306
χ-Cursed equilibrium, 112
D
Dahl, G. B., 208
Darley, J. M., 190
Debreu, G., 389 DeBruine, L. M., 463
Decision making for our future self, 287–290 Decision under risk and uncertainty, 214–249 Decision under risk or uncertainty, 250–277
Default options, 70–92
preference formation, framing, and, 72–76 Delay–speedup asymmetry, 341
Della Vigna, S., 30, 369 Demand curves, 13
rationality and, 4–8 Dependent option, 224 Detection of dominance, 258 Dickhaut, J., 451
Dictator game, 394–397 inequity-averse preferences in, 421
Diminishing sensitivity, 78–79 Dino, R. N., 391
Directly revealed preference, 397 Disconfirmatory information, 192 Discount factor, 311 Discounting
in continuous time, 312–313
with prospect-theory value function, 336–343 stability, question of, 313–318
Disposition effect, 58 Distrust, 465–466 Diversification bias, 144 Dodonova, A., 35 Doherty, M. E., 192 Dominant strategy, 94
Double-entry accounting system, 45–46 Douglas, R. W., 110
Dual entitlement, 425 Dutch auctions, 101–106 Dyer, D., 115
E
Easterlin, R. A., 407
Editing component of prospect theory, 257 cancellation, 257–258
coding, 257 combination, 257
detection of dominance, 258 segregation, 257 simplification, 258
Edwards, W., 178, 183–184 Einhorn, H. J., 178 Ellsberg Paradox, 241–242 Ellsberg, D., 242
Emotions role in choice, 297–299
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498 |
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INDEX |
Empirical discount factor, 331 Endowment effect, 82
loss aversion and, 85–87
English auction, 99–100, 103, 105–106 as a first-price open-bid auction, 99 people’s tendency in 100
minimum bid levels influence in, 100 rational prices in, 105–106
Eply, N., 52 Expectation, 101
Expected utility theory, 33, 127, 216 risk aversion under, 128
risk loving under, 131 risk neutrality under, 130
violations of, practical implications, 240–242
Experimental economics/Experiments
behavioral economics and, relationship between, 10–12
in causal relationship establishment, 12 Exponential time discounting, 311 External validity, 11
Eyster, E., 112, 114
F
Fairness, 427–431
Battle of the Sexes game, 429–431 fairness utilities in, 431 Prisoner’s dilemma, 443
cruelty, 428 Dictator game, 421
kindness function, 428, 432–443 material outcomes, 47
Falk, A., 424
False consensus, 180
Fehr, E., 420, 424, 439, 442, 447, 456, 466 First-price auctions, 95, 101–105
expectation, 101
probability of an outcome, 101 support, 101
uncertainty, 102 Fischbacher, U., 424 Fischhoff, B., 305 Fixed costs, 39
rational choice with, 18–21 sunk costs versus, 21–22
Flat-rate bias
procedural explanations for, 31–32 framing, 31
payment decoupling, 31 transaction utility and, 29–30
Flat-rate pricing, 18, 21 corner solution, 21 internal solution, 21
Forsythe, R., 395 Framing, 31, 55, 72–76
Frank, R. H., 405–406, 414 Freddie, 171n1, 172 Free-rider problem, 410
Fully additive model, 310–312 Fully cursed equilibrium, 112 Fungible money, 46
G
Gächter, S., 439, 442, 466 Gain–loss asymmetry, 335 Gambler’s fallacy, 177 Game, 93
Geanakoplos, J., 443–444
Generalized axiom of revealed preference (GARP), 400
Ghirardato, P., 244 Gifts, 62–64 Gilbert, D. T., 294 Gilboa, I., 243 Gill, M. J., 294 Gilovich, T., 176
Glaeser, E. L., 455, 462 Goldstein, D., 71–72 Gourville, J. T., 59
Grether, D. M., 163–165, 171, 178, 183 Gross, P. H., 190
Güth, W., 418
Guthrie, C., 226
H
Harbaugh, W. T., 408
Harstad, R. M., 96–97, 99
Heath, C., 45
Hedonic editing, 54
Hedonic framing, 55
Hernstein, R. J., 145, 147
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Index |
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499 |
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Heuristics bidding, 99–100
decision mechanism, 8 representativeness, 165
Hindsight bias, 281–308, See also Projection bias and curse of knowledge, 303–306
Ho, T. -H., 236
Hoffman, E., 404 Hogarth, R. M., 178
Homo economicus, 6–7, 389–390, 401 Hortaçsu, A., 100
Hot–cold empathy gap, 297 modeling, 299–303
Hot hand theory, 176 Hot state, 297 Huang, M., 138
Hyperbolic discounting, 318–324, See also Naïve hyperbolic discounting
quasi-hyperbolic time discounting, 319 SNAP problem with, 323
Hypothesis-based filtering, 193 Rabin and Schrag’s model of, 196
I
Idson, L. C., 52 Illusion of control, 178
Immediate cost activity, 363 Immediate reward activity, 363 Income expansion path, 4
Income from varying sources, rational choice with, 42–45
Incremental bidding behavior, 98 Independence, 226–234
of irrelevant alternatives, 362–364 segmentation independence, 127, 132 statistical, 159
in preferences for consumer goods, 18–19, 25, 42–44, 49–51
Independence axiom, 159 allowing violations of, 234–236 in decision under risk, 226–234
Indifference curves, 60–61, 77–81 prospect theory and, 259–266 shape, 236–237
with constant loss aversion, 91–92 Indirect utility function, 42
Indirectly revealed preference, 397 Induced values, 98
Inequity aversion, 420–425 in dictator game, 421
Inference, 158
Infinite planning horizon, 310 Information, 208–210
bad information, 208–210 confirmatory information, 192 disconfirmatory information, 192 rational information search, 188–192
Instantaneous utility function, 284, 310 Integrated events, 47–48
Integrating, 52–55
Intermediate loss aversion, prospect theoretic value function with, 337
Internal validity, 11 Intertemporal choice, 282–286
with projection bias, 289 standard models of, 282–286
Intransitive preferences, modeling, 220–226 regret and similarity, 220–226
Investments, 57–60
Irrationality, 1–14 Isolation effect, 252–253
J
Jepson, C., 285
Johansson-Stenman, O., 462
Johnson, E. J., 54, 71–72, 75–76
Just, D. R., 27, 197
K
Kagel, J. H., 96–97, 99, 109n1, 114–116
Kahneman, D., 26, 37, 72, 78, 80, 86, 88–89, 142, 150, 163, 165–166, 170, 173–175, 179, 183–184, 219, 233, 247, 251–252, 255, 257, 259–260, 262, 266, 270–271, 275, 425, 436
Keefer, P., 458 Khoroshilov, Y., 35
Kindness functions, 428, 432–443 King, S., 376
Kirschsteiger, G., 439 Knack, S., 458
Knetsch, J. L., 72, 86, 88, 425, 436 Knight, F. H., 246
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500 |
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INDEX |
Knightian risk, 215
Knightian uncertainty, 215
Krause, K., 408
Kridel, D. J., 30, 33
L
Laibson, D., 324, 377–379
Lakshminarayanan, V., 82 Langer, E. J., 177
Law of large numbers, 159 Law of small numbers, 169–178
conservatism versus representativeness, 178–179 Ledgers, 45
Lehman, D. E., 30, 33 Leland, J, 225 Lepper, M., 198
Levin, D., 96–97, 99, 114, 116 Lichtenstein, S., 179, 219 Liday, S. J., 408
Likelihood function, 161 Linear pricing, 18
List, J. A., 88
Loewenstein, G., 31, 55–56, 67, 72, 74, 143, 149–150, 209, 285, 288, 297, 304, 336, 340, 342
Loomes, G., 218, 221–222, 267 Loomes’ Portfolio problem, 268 Lord, C., 198
Loss aversion, 26, 253–257 constant additive loss aversion, 81 constant loss aversion, 80
shape of the indifference curve with, 91–92 in consumption space, 78–79
and endowment effect, 85–87 evolutionary explanation for, 81–82
intermediate loss aversion, 337–338, 342–343 strong loss aversion, 52–54
Lovallo, D., 150, 202, 204 Lubatkin, M. H., 391 Lucking-Reiley, D., 99, 105 Lundberg, S., 391
M
Maccheroni, F., 244
Machina, M. J, 229
Madden, G. J., 335
Madrian, B., 75
Mahmud, M., 462 Mak, D., 52
Malmendier, U., 30, 197, 369 Mandel, G. N., 303
Marginal costs, rational choice with, 18–21 Marginal utility, 4
Marinacci, M., 244
Marketplace, trust in, 460–465, See also under Trust Marschak, J., 229
Marschak–Machina triangle, 228 Martinsson, P., 462
Maxmin expected utility theory, 243 α-maxmin expected utility theory, 244
McCabe, K., 404, 451 McKelvey, R. D., 402–403 Mead, W. J., 110 Melioration, 137, 146–149 Mental accounting, 41–69
accounts, 62–64
accounts, integrating, or segregating, 52–55
budgeting bundles, 49–52 budgets, 62–64
closing accounts, 57–60 consumption bundles, 49–52 credit card purchases, 55–57 gifts, 62–64
investments, 57–60 opening, 57–60
payment decoupling, 55–57 prepurchase, 55–57
rational choice over time, 64–66
rational choice with income from varying sources, 42–45
rational choice, temptation and gifts versus cash, 61–62
reference points and indifference curves, 60–61
temptation, 62–64 theory of, 45–49
Mental urn, 170
Miller, J., 397, 400–401 Miravete, E. J., 33 Money pump, 218 Moral hazard, 460
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Index |
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501 |
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Morgenstern, O., 228, 246 Moseidjord, A., 110 Mullainathan, S., 182 Multiple events, 52
Multiple rational choice with certainty and uncertainty, 126–133
Murnighan, J. K., 423 Mynatt, C. R., 192
N
Naïfs, 368–371
Naïve decision makers, 352–354 Naïve hyperbolic discounting, 318–324
naïve quasi-hyperbolic discounting, 324–330
Naïve procrastination, 309–346 discounting in continuous time, 312–313 fully additive model, 310–312
Narrow bracketing, 135–139 and motivation, 149
Nash equilibrium, 95 Navarrete, J., 220
Negatively correlated random variable, 159 Neilson, W., 270
Nicholson, W., 4 Node, 95
Nonexcludable good, 409 Nonoptimality between budgets, 50 Nonrival good, 409
Nordhaus, W. D., 28 Normal distribution, 158
O
O’Donoghue, T., 288, 296, 361, 368, 370 Ockenfels, A., 97– 98
Odean, T., 58, 205
Odum, A. L., 335 One-tailed test, 157 Opportunism, 464
Optimistic overconfidence, 204 Order axiom, 217
Oskamp, S., 206, 210
Overbidding, procedural explanations for, 97 Overconfidence, 204–207
of one’s own knowledge, 204 optimistic overconfidence, 204
P
Palfrey, T. R., 402–403 Pareto optimal outcomes, 432 Partial naïf, 368
Payment decoupling, 31, 55–57 Payment depreciation, 57 P-bet, 219
Peanuts effect, 148–150 Pearce, D., 443–444 Phelps, E. A., 462 Pieters, R, 226
Policies and sunk cost reasoning, 24 Portfolio problem, 133–134, 153–154
bracketing, 139, 154–155 Positional externalities, 406
Positively correlated random variable, 159 Postlewaite, A., 209
Precision, 162
Preference formation, 72–76 Preference reversals, 77, 219 Preferences, 3
complete, 3 transitive, 3
Prelec, D., 31, 55–56, 72, 74, 336 Prepurchase, 55–57
Present biased preferences, 323 Preston, M. G., 237
Primacy effect, 178 Prior function, 161
Prisoner’s Dilemma, 443–446 Probability density function, 119 Probability of an outcome, 101 Probability weighting, 232, 237–240, 257
without preferences for dominated, 239–240 shape, evidence on, 237–239
Procedural explanations for flat-rate bias, 31–32
Procedural rational model, 9 Procrastination, 309–346, See also Naïve
procrastination Profit-maximization model, 2, 7
Projection bias, 281–308, See also Hindsight bias; Intertemporal choice
and addiction, 290
addictive behaviors with, 292 Prorate future payments, 56
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502 |
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INDEX |
Prospect theory, 26, 78, 250–277, See also Cumulative prospect theory
cumulative prospect theory, 259
decision under risk or uncertainty, 250–277 isolation effect, 252–253
loss aversion, 253–257 reflection effect, 251–252 risk aversion, 253–257 risk loving, 253–257
effectiveness of, 267–269
and indifference curves, 259–266
and risk aversion in small gambles, 269–274 three-component version of, 257
editing, 257
probability weighting, 257 value function, 257
value function, 47 discounting with, 336–343
with intermediate loss aversion, 337 Psychological games, 443–449
Prisoner’s Dilemma, 421–446 psychological equilibrium, 444
Public goods provision and altruistic behavior, 409–413
nonexcludable good, 409 nonrival good, 409
Public policy and sunk cost fallacy, 24
Q
Quasi-hyperbolic time discounting, 319, 324 Quiggin, J., 240
R
Rabin, M., 112, 114, 117, 140–141, 149–150, 170–171, 171n1, 193, 196, 269–270, 273, 288, 361, 368, 370, 427–429, 432, 443
Rabin’s Theorem, 142
Raiffa, H., 200–201
Ranney, C. K., 317
Ransom, M. R., 208 Rapoport, A., 326, 331, 333
Rational bidding in auctions, 93–98 in Dutch, 105–106
in English, 105–106
first-price auctions, 101–106, See also individual entry
overbidding, procedural explanations for, 97 rationality levels, 98–99
second-price auction, 93 uncertainty in, 107–110 under Dutch, 101–105
Rational bracketing for variety, 144
Rational choice, 39, 126–133, See also Multiple rational choice
with fixed and marginal costs, 18–21 and getting and giving up goods, 83–85 with income from varying sources, 42–45 over time, 64–66
temptation and gifts versus cash, 61–62 theory, 2–4
Rational decision under risk, 215–220, 226–234
Rational explanations
for contextdependent preferences, 36–37 of status quo bias, 76–77
for sunk cost fallacy, 28–29 for winner’s curse, 117
Rational information search, 188–192 Rational modeling, 1–4
preferences, 3
Rationality, 1–14, See also Bounded rationality and altruism, 392–397
and demand curves, 4–8 Rationalization, 1–14
Rationally selfless, question of, 397–403 Read, D., 143, 149–150, 294
Recency effect, 178 Reciprocity, 466–469
as a business model, 468–469 fairness and, 467–468
Recursive optimization problem, 348 Reference points, 34–36, 60–61, 77–81 Reference structure, 78
Reference transaction, 425 Reflection effect, 251–252 Regret theory, 221–226
dependent option, 224 regret aversion, 221
regret theory utility function, 221 similarity in preference cycling, 224 skew symmetric utility function, 221
Relative risk aversion, 131
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Index |
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503 |
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Representativeness, 165–166, See also Law of small numbers
and availability, 156–186 availability heuristic, 180–181 base rate neglect, 165 calibration exercises, 162–164 conservatism versus, 178–179 heuristic, 165
history, 183
statistical inference and information, 157–162 Revealed preference, 397
directly revealed, 397 indirectly revealed, 397 strictly revealed, 400
Revenues minus costs, 7 Reversion to mean, 175 Richard, J. -F., 109n1 Risk, 215
independence decision under, 226–234 rational decision under risk, 226–234 risk premium, 205
Risk aversion, 106, 128, 140–143, 253–257 and concavity, 254
and production, 203–204
and prospect theory value function, 256 in small gambles, 269–274
under expected utility theory, 128 Risk loving, 130, 253–257
and convexity, 254
and prospect theory value function, 256 under expected utility theory, 131
Risk neutrality under expected utility theory, 130 Roberson, B., 104
Ross, L., 198
Ross, M., 207
Roth, A. E., 97–98, 423 Rothbart, M., 182 Rowthorn, R., 465 Rubinstein, A., 224–225
S
Sacket, D. L., 285
Salience, 73
Samuelson, P. A, 6, 28, 132–133, 135–136, 138, 246
Samuelson, W. F., 76–77, 114–115
Sandmo, A., 28
Santos, L., 82 Scharlemann, J. P. W., 457 Schmeidler, D., 243 Schmidt, K. M., 420 Schmittberger, R., 418 Schrag, J. L., 193, 196 Schulze, W. S., 391 Schwarze, B., 418 Secondary data set, 10
Second-price auctions, 93, 96 Segmentation independence, 127 Segregated events, 47–48 Segregation, 52–55, 257 Selfishness, 389–416
rationally selfless, question of, 397–403 selfishly selfless, 403–408
Self-serving bias, 207–208, 423 Shea, D., 75
Shefrin, H. M., 62–63 Shelor, R. M., 181 Sicoly, F., 207
Significantly different mean, 159 Similarity in preference cycling, 224 Simon, C. P., 13
Simon, H. A., 8, 12 Simonson, I., 143–144, 150 Simple projection bias, 289 Simplification, 258
Single Budget Category, 50
Skew symmetric utility function, 221 Slovic, P., 219, 465, 470
Smith, V. L., 104, 404 Snyder, C. F., 4 Snydor, J., 272–273 Social capital, 455 Social heuristics, 150 Social norm, 453
Social preferences, 389, See also Altruism Sokol-Hessner, P., 462
Soll, J. B., 45
Soman, D., 59
Sophisticated decision makers, 352–354 Sorensen, P. E., 110
Source-based consumption and application, rational explanations for, 66–67
Spencer, M., 52
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504 |
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INDEX |
Spiteful players, 420 Stacchetti, E., 443–444 Stahl, D. O., 98
Standard normal distribution, 158 Stanley, D. A., 462
Starmer, C, 215, 218, 221–222, 232–233 Stationarity, 312
Status quo bias, 70–92
rational explanations of, 76–77 Stevenson, B., 407
Stochastically dominant gamble, 217 Strategy, 96
Strong axiom of revealed preference (SARP), 398 Strotz, R. H., 313, 318, 344
Subadditivity, 232
Subgame-perfect Nash equilibrium (SPNE), 402 Subjective expected utility theory, 242 Subproportionality, 338–339
Sugden, R., 218, 221–222 Sundali, J., 177
Sunk cost fallacy, 22–24 public policy and, 24
Sunk costs
fixed costs versus, 21–22 in prospect theory, 26
rational explanations for, 28–29 reactions to, 25–28
theory, 25–28 Sunstein, C., 37
Superadditive probabilities, 239 Svenson, O., 207
T
Take-It-or-Leave-It game, 401–403, 457 Tate, G., 197
Taylor series approximation, 332 Temptation, 62–64
Thaler, R. H., 18, 22, 25–27, 34, 37, 54, 62–63, 72, 86, 88, 116, 135–137, 150, 319, 330–331, 360, 425, 436
Theory and reference-dependent preferences, 35–36
Time inconsistency, commitment under, 351–360 Time-inconsistent preferences, 282, 288
TIOLI games, See Take-It-or-Leave-It game Torrance, G. W., 285
Train, K. E., 33
Transaction utility, 17–40, 48
and consumer preferences in reference, 34–35
definition, 18
and flat-rate bias, 29–30
rational explanations for contextdependent preferences, 36–37
theory and reference-dependent preferences, 35–36
Transactions costs, 461 Transitive preference, 3 Transparency, bidding, 99–100 Trust, 450–471
and distrust, 465–466 in marketplace, 460–465
transactions costs, 461 trust game, 451
behavior in, 452
with information on history, 454 and trustworthiness, 455–460
cheap talk, 455 social capital, 455
Take-It-or-Leave-It Trust Game, 457 Tversky, A., 26, 89, 142, 163, 165–166, 170,
173–176, 179, 183–184, 219, 233, 247, 251–252, 255, 257, 259, 260, 262, 266, 270–271, 275
Tweney, R. D., 192 Two-part tariff, 18–20 corner solution, 19
internal solution, 20
Two-period consumption model without discounting, 65
Two-tailed test, 158
U
Ubel, P. A., 285 Ultimatum game, 418 Uncertainty, 102, 215
in auctions, 106–107 in bidding, 119–121
in multiple rational choice, 126–133 in rational bidding, 107–110
Uncommiting mechanisms, 374–377 Unraveling effect, 402
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Index |
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505 |
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Utility function, 140–143 |
W |
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calibration of, 141 |
Wakker, P. P., 276 |
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Utility maximization |
Waldfogel, J., 394 |
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with flat-rate pricing, 21 |
Wansink, B., 27 |
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model, 2–4 |
Wason, P. C., 191–192, 210 |
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assumptions, 5 |
Weak axiom of revealed preference |
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violations, 5 |
(WARP), 398 |
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with a two-part tariff, 19–20 |
Weber, M., 304 |
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Utility of wealth, 216 |
Weighted expected utility theory, 235 |
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Weisman, D. L., 30, 33 |
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V |
Wertenbroch, K., 63, 360 |
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Vallone, R., 176 |
Wilde, P. E., 317 |
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Value function, 138, 257 |
Wilson, P. W., 98 |
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acquisition value function, 55, 59 |
Wilson, R., 109 |
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definition, 47, 255 |
Wilson, T. D., 294 |
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over gains, 48, 52–54, 255 |
Winner’s curse, 110–117 |
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over losses, 48, 52–54, 255 |
anchoring and adjusting, 110–117 |
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prospect theory value function, 46–49, 60, 221, |
χ-cursed equilibrium, 112 |
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255–259, 261, 336–344 |
fully cursed equilibrium, 112 |
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use of, 48–49 |
rational explanations for, 117 |
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Van Leeuwen, B., 294 |
term history, 116 |
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Varian, H. R., 4 |
Winner’s curse, 93–121 |
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Variance, 133 |
Wolfers, J., 407 |
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Variety |
Woodward, E. L., 305n1 |
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bracketing and, 144 |
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in rational bracketing, 144 |
Y |
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Vesterlund, L., 395–396 |
Yagil, J., 326, 331, 333 |
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Vickrey auction, 94 |
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Visceral factors in choice, 297–299 |
Z |
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Vogelsang, T. J., 296 |
Zeckhauser, R., 76–77 |
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Von Neumann, J., 228, 246 |
Zeelenberg, M., 226 |
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