Chapter 3: Economic Incentives Transform Psychological Anomalies with Reiner Eichenberger
APPROACHES TO ANALYSING ANOMALIES Over the last 20 years, characteristics of human behaviour have been identiﬁed which systematically deviate from the predictions of unbounded procedural rationality, and in particular from conventional neo-classical economics. These characteristics of human behaviour are often called ‘anomalies’, though viewed through non-neoclassical spectacles such behaviour may indeed look quite normal. The best-known instances are: ● ● ● ● ● ● ● ● endowment effect: goods in a person’s possession are valued more highly than those not held in the endowment; reference point effect: people do not evaluate ﬁnal states of wealth, but mainly deviations from a speciﬁc reference point, which is most often the status quo; opportunity cost effect: out of pocket monetary cost is given greater weight in the decision calculus than opportunity cost of the same size; certainty and small probability effects: high and low chance events in particular are treated in a peculiar way by individuals; they consider certainty to be completely different from a very high probability and lend too much weight to small probabilities; anchoring effect: social states are evaluated from a particular starting point, the choice of which inﬂuences behavioural outcomes; availability and representativeness biases: recent, spectacular or personally experienced events are overweighted when individuals make decisions; overconﬁdence effect: people are convinced that they know observable facts better than is actually the case; framing effect: the way a decision problem is formulated, and the way the information is presented, affects individual decisions; 21 22 ● Integrating psychology preference reversal effect: individuals tend to choose high...
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