Behavioural Economics
Articles featuring topics linked to any aspect of behavioural economics
Loss aversion and experiences of inflation
Few people believe that the officially published measure of inflation accurately captures their own experiences and problems - this is hardly a surprise since our own spending patterns will rarely correlate precisely with the weights used to calculate the consumer price and retail price index. But there is a real danger that the published inflation figures are losing credibility - and with it comes a risk of a larger-than-expected wage-price effect into 2009.
David Leonhardt writing in the New York Times links aspects of behavioural economics to the vexed question of just how high is inflation. A really interesting piece and well worth reading:
“Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. If you have to sell your house for less than you bought it for, you’re really unhappy. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago. There is also something particular to inflation that aggravates loss aversion. Price increases are obvious. But price declines are often hidden. The cost of an item stays about the same for years, while everything else gets more expensive and nominal incomes rise.”
Freeconomics
Chris Anderson’s book “The Long Tail” was a best seller and highly influential read a couple of years ago ...it certainly challenged my long held views about the nature of scarcity in an increasingly digital age. His new book due out in 2009 is about the power and impact of the word “free” in economcis and markets .... and there is a terrific article in the Guardian today about this written by Stuart Jeffries.
“Anderson’s freeconomics thesis is that more and more goods and services are being provided for free and that those businesses that fail to follow suit are likely to go to the wall. “As much as we complain about how expensive things are getting, we’re surrounded by forces that are making them cheaper,” Anderson wrote in a recent article that will form the basis of a book called Free, to be published next year. “Forty years ago, charity was dominated by clothing drives for the poor. Now you can get a T-shirt for less than the price of a cup of coffee, thanks to China and global sourcing. So too for toys, gadgets and commodities of every sort. Even cocaine has pretty much never been cheaper (globalisation works in mysterious ways).”
The remainder of the article is here and you might also want to pop along to Chris Anderson’s blog. Dan Ariely also writes about the extraordinary influence of the word free on our behaviour as consumers in his new book Predictably Irrational.
Learning Lessons from: Experiment 11
Last Thursday I guinea pigged for an economics experiment at UCL. Unfortunately it wasn’t anything as exciting as Tim’s ones, no apples or chocolates were on offer but it was fascinating to see an economics lab from the inside. The invitation simply named it “Experiment 11” which I thought to be rather mysterious but it was probably just because economists don’t have an imagination. I’ll try and describe what it was like, but it will be very confusing so bear with me.
read more...»More proof that sex sells
At the Tutor2u economics blog, we’ve written incessantly about two of our most favourite authors: Tim Harford and Dan Ariely. Now Amazon’s new OMNIVORACIOUS books blog has made my dream come true and pitted the two pop economists against each other in a lively debate. Who will triumph? Logic or irrationality?
Going Up
What would you choose to do if you were to find yourself in an elevator heading at speed towards the ground floor? My advice is to crouch in the corner.
Many people have an inbuilt fear for elevators - we worry when we all pile into one at the airport, on ski-lifts or in a multi-storey hotel; we often cast an eye to the notice on the inside telling us the maximum weight capacity and wonder in silence whether that portly guy with two bags should really have been told to wait for the next lift to arrive. Our fears can be hugely disproportionate to the risks involved. Most of the people who die in elevator accidents are employees of the company using them more people people die in car accidents in five hours than perish in elevators in any one year.
But perhaps we should salute elevators for they give us the potential to build vertically and save on precious land space, and they are remarkably energy efficient. Demand for elevators will surely rise as urban populations expand. The Otis Elevator Company claims that its products carry the equivalent of the world’s population every five days.
This article from the New Yorker is a good read - thanks to Tyler Cowen at Marginal Revolution for pointing me in its direction.
Tim Harford at the RSA
I headed to the Royal Society for the encouragement of the Arts yesterday to hear Tim Harford speak on The Logic of Life. Tim’s talks in London are invariable a sell out and last night was no exception. His recent globetrotting book tour has afforded the opportunity to flesh out some of the key themes in his book and we were treated to a very entertaining and thought provoking talk.
The best £4.79 you will spend this summer
Robert Frank’s book “The Economic Naturalist” is published in paperback in the UK this month and is available for £4.79 from Amazon. Full of really interesting economic enigmas, I have used it on several occasions with my students and the feedback has been superb. He was featured in the Independent on Friday - here is the link to the article.
It’s economics stupid: How money explains everything: Supply, demand and market forces are not just academic buzzwords – they’re all around us, influencing everything from fridge-freezers to sex appeal. Robert H Frank, an Ivy League professor who brought the study of cost-benefit solutions to America’s masses, explains how cold, hard cash really does make our world go round.
Predictably Irrational on Facebook
Check out these videos!
The new Predictably Irrational Facebook group is here!
Caveman economics
I am greatly enjoying Predictably Irrational by Dan Ariely - who spoke at the LSE last week (there was a long queue of my students wanting to buy the book). Today’s Mail on Sunday previews another example of the new genre of popular books on behavioural economics written by Professor Pete Lunn from the Economic and Social Research Institute and given the enticing title Basic Instincts: Human Nature and the New Economics. It is published by Marshall Cavendish next month, few details available yet. I will keep my eye out and add to the blog when they are more widely known.
Revision: Expectations in Economics
Expectations are forecasts or views that decision makers hold about future prices, sales, incomes, taxes, or other key variables. Our expectations also shape today’s decisions – since expectations can become a “self-fulfilling prophecy.” There is no doubt that expectations play a really important role in determining consumer and business decisions. From speculative behaviour in commodity markets, to the carry trade in foreign exchange and to expectations of changes in tax policy, how our expectations are formed and the factors that might cause them to change matter a great deal. Students can score higher marks for critical evaluation if they bring in the concept of expectations into their discussions.
I have attached a revision mind map in pdf format on expectations in economics. There are many applications of the concept in both AS and A2 micro and macroeconomics.
The mind map includes sections on
Speculative behaviour in markets
Adaptive Expectations
Rational Expectations
Behavioural Economics
Expectations and Government Economic Policy
Expectations of inflation
Microeconomic applications of expectations
Mindmap file
Expectations.mmap
Pdf version of the mindmap
Expectations_in_Economics.pdf
