© Nick Wilkinson & Matthias Klaes 2012
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First published 2012 by
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Printed and bound in China
iii
Brief Contents
Detailed Table of Contents
iv
List of Figures
viii
List of Tables
ix
Preface
x
Acknowledgments
xiii
PART I INTRODUCTION
CHAPTER 1 Nature of Behavioral Economics
1
CHAPTER 2 Methodology
28
PART II FOUNDATIONS
CHAPTER 3 Values, Preferences and Choices
62
CHAPTER 4 Beliefs, Heuristics and Biases
115
CHAPTER 5 Decision-making under Risk and Uncertainty
146
CHAPTER 6 Mental Accounting
218
PART III INTERTEMPORAL CHOICE
CHAPTER 7 The Discounted Utility Model
260
CHAPTER 8 Alternative Intertemporal Choice Models
283
PART IV STRATEGIC INTERACTION
CHAPTER 9 Behavioral Game Theory
334
CHAPTER 10 Social Preferences
391
PART V
CONCLUSION
CHAPTER 11 Behavioral Economics: Summary and Outlook
459
Bibliography
504
Index
559
iv
Detailed Table of Contents
List of Figures
viii
List of Tables
ix
Preface
x
Acknowledgments
xiii
PART I INTRODUCTION
CHAPTER 1 Nature of Behavioral Economics
1.1
Behavioral economics and the standard model
2
1.2
History and evolution of behavioral economics
12
1.3
Relationship with other disciplines
15
1.4
Objectives, scope
and structure
19
1.5 Summary
20
1.6 Review
questions
20
1.7 Applications
20
Case 1.1
Loss aversion in monkeys
21
Case 1.2 Money
illusion
23
Case
1.3
Altruism – the joy of giving
26
CHAPTER 2 Methodology
2.1
Theories
29
2.2 Evidence
36
2.3 Consilience
45
2.4 Summary
52
2.5 Review
questions
53
2.6 Applications
53
Case 2.1
Do economists need brains?
53
Case 2.2
Riots in the UK
57
PART II FOUNDATIONS
CHAPTER 3 Values, Preferences and Choices
3.1
The standard model
64
3.2
Axioms, assumptions and defi nitions
68
3.3
The evolutionary biology
of utility
71
3.4 Broadening
rationality
74
3.5
Types of utility
86
3.6
The neuroscientifi c basis of utility
93
v
3.7 Policy
implications
97
3.8 Summary
102
3.9 Review
questions
103
3.10 Applications
104
Case 3.1 Drug
addiction
104
Case 3.2
When abstention is better than moderate consumption
105
Case
3.3
Environmental protection
109
Case
3.4
The way the brain buys
109
CHAPTER 4 Beliefs, Heuristics and Biases
4.1
The standard model
117
4.2 Probability
estimation
119
4.3 Self-evaluation
bias
124
4.4 Projection
bias
129
4.5 Magical
beliefs
130
4.6
Causes of irrationality
132
4.7 Summary
140
4.8 Review
questions
140
4.9 Review
problems
141
4.10 Applications
141
Case
4.1
Fakes and honesty
141
Case 4.2
Trading
on testosterone
143
Case 4.3
Celebrity contagion and imitative magic
143
CHAPTER 5 Decision-making under Risk and Uncertainty
5.1 Background
148
5.2
Conventional approaches to modifying EUT
155
5.3 Prospect
theory
160
5.4
Reference points
164
5.5 Loss-aversion
167
5.6
Shape of the utility function
171
5.7 Decision-weighting
176
5.8
Criticisms of prospect theory
188
5.9
Recent theories and conclusions
197
5.10
Summary 207
5.11 Review
questions
208
5.12 Review
problems
209
5.13 Applications
210
Case
5.1
The endowment effect
210
Case
5.2
Insensitivity to bad income news
213
Case
5.3
Loss-aversion
in golf
215
CHAPTER 6 Mental Accounting
6.1
Nature and components of mental accounting
219
6.2
Framing and editing
220
6.3
Budgeting and fungibility
225
6.4
Choice bracketing and dynamics
233
6.5 Policy
implications
239