Introduction to Behavioral

vi

6.6 Summary 

 

249

6.7 Review 

questions 

250

6.8 Applications 

251

 Case 

6.1 

The equity premium puzzle 

251

 

Case 6.2 

Why you can’t fi nd a cab on a rainy day  

254

 

Case 6.3  

Consumer spending and housing wealth 

257

PART  III   INTERTEMPORAL CHOICE 

CHAPTER 7   The Discounted Utility Model

7.1 Introduction 

261

7.2 

Origins of the DUM  

262

7.3  

Features of the DUM  

265

7.4  

Methodology 

269

7.5 

Anomalies in the DUM 

273

7.6  

Summary 

278

7.7  

Review questions 

278

7.8 Applications 

279

 

Case 7.1 

Empirical estimates of discount rates  

279

CHAPTER 8   Alternative Intertemporal Choice Models 

8.1 Time 

preference 

285

8.2 

Time inconsistent preferences  

291

8.3 Hyperbolic 

discounting 

293

8.4 

Modifying the instantaneous utility function  

301

8.5 

More radical models 

305

8.6 Empirical 

evidence 

310

8.7 Policy 

implications 

315

8.8 Summary 

324

8.9 Review 

questions 

325

8.10 Applications 

326

 

Case 8.1 

Price plans for gym memberships 

326

 

Case 8.2 

The savings problem  

327

 

Case 8.3  

The desire for rising consumption profi les  

332

PART IV   STRATEGIC INTERACTION 

CHAPTER 9   Behavioral Game Theory

9.1 

Nature of behavioral game theory 

336

9.2 Equilibrium 

342

9.3 Mixed 

strategies 

350

9.4 Bargaining 

 

358

9.5 

Iterated games  

365

9.6 Signaling  

372

9.7 Learning 

 

377

9.8 Summary 

382

---

vii

 

9.9 Review 

questions 

383

9.10 Review 

problems 

384

9.11 Applications 

385

 

Case 9.1  

Penalty kicking in professional soccer 

385

 

Case 9.2 

Impasses in bargaining and self-serving bias  

387

 Case 

9.3 

Market entry in monopoly 

388

CHAPTER 10   Social Preferences

10.1 

The standard model  

393

10.2 

The nature of social preferences 

396

10.3 

Factors affecting social preferences 

405

10.4 

Modeling social preferences 

417

10.5 

Inequality-aversion models  

421

10.6 Reciprocity 

models 

425

10.7 Empirical 

evidence 

430

10.8 Policy 

implications 

441

10.9 Summary 

 

447

10.10 Review questions 

448

10.11 Applications 

449

 Case 

10.1  The Wason Test  

449

 Case 

10.2  Public goods and free riding  

453

 Case 

10.3  Sales force compensation 

455

 Case 

10.4  Too much virtue is a vice 

457

PART V   CONCLUSION 

CHAPTER 11   Behavioral Economics: Summary and Outlook

11.1 

The agenda of behavioral economics  

461

11.2 

Criticisms of behavioral economics 

463

11.3 Methodology 

 

465

11.4   Are we really irrational? 

470

11.5 

Welfare and happiness 

475

11.6 

Problems in pursuing happiness 

480

11.7 Policy 

implications 

484

11.8 

Future directions for behavioral economics 

491

11.9 Applications 

495

 Case 

11.1  The effects of brain damage on decision-making 

495

 Case 

11.2  Pursuing happiness  

497

 Case 

11.3  The bioeconomic causes of war  

499

 Case 

11.4  How to get children to eat vegetables 

502

Bibliography

 504

Index

 

559

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viii

List of Figures

3.1 

Indifference curve map  

66

3.2 

Indifference curves and consumer equilibrium 

67

3.3 

Moment utility of two colonoscopies 

90

3.4 

Equilibrium with face-value interpretation 

106

3.5 

Equilibrium with weak diagnostic utility 

107

3.6 

Equilibrium with moderate diagnostic utility 

107

3.7 

Equilibrium with strong diagnostic utility 

108

5.1 

EUT utility function 

152

5.2      Rank-dependent probability weighting function with inverted S-shape 

159

5.3 

Friedman–Savage utility function 

171

5.4 

Markowitz utility function 

172

5.5 

PT utility function 

173

5.6 

A typical PT weighting function (1979 version) 

179

5.7 

A typical PT weighting function (1992 version) 

181

5.8  

Empirical decision-weighting function for TK data 

185

5.9 TAX 

model 

 

204

8.1 

Shapes of discount functions 

294

8.2 

Exponential discounting and consistent time preferences 

295

8.3 

Hyperbolic discounting and inconsistent time preferences 

296

8.4 

Trend in household savings rates 

328

9.1 

Extensive form of ultimatum game 

338

9.2 

Extensive form of ultimatum game (Figure 9.1 repeated) 

345

9.3 

Cournot response curves 

347

9.4 

Centipede game 

367

10.1 

Disappointment/retaliation game 

421

10.2 

Centipede game with reciprocity 

429

10.3 Wason 

Test 

 

450

10.4 

Wason Test in terms of a social contract 

450

10.5 

Wason Test in terms of a switched social contract 

451

10.6 

Wason Test in terms of different perspectives 

452

10.7 

Evolution of cooperation in public goods game 

454

11.1 

The Easterlin paradox (US, 1973–2004) 

476

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