StandardModel.pptx

The standard (neo-classical) economic model of consumer behavior and some problems with it Behavioral Economics in Consumer Decision Making What is it? The standard, or neo-classical, economic model is the dominant framework for thinking about consumer welfare and consumer choice. It is what you will learn in any microeconomics course. Assumptions of the Standard Economic Model of Consumer Behavior People have known preferences. Assumptions of the Standard Economic Model of Consumer Behavior People have known preferences. Full Internal Knowledge Assumptions of the Standard Economic Model of Consumer Behavior People have known preferences. People act with full information. Full Internal Knowledge Assumptions of the Standard Economic Model of Consumer Behavior People have known preferences. People act with full information. Full Internal Knowledge Full External Knowledge Assumptions of the Standard Economic Model of Consumer Behavior People have known preferences. People act with full information. People choose rationally so as to maximize utility. Full Internal Knowledge Full External Knowledge Maximizing Choices Assumptions of the Standard Economic Model of Consumer Behavior People have known preferences. People act with full information. People choose rationally so as to maximize utility. Full Internal Knowledge Full External Knowledge Maximizing Choices Your chance to explain The best way to learn it is to explain it to someone else. Pick one or two others to work with. (If you get four people, split into two groups of two.) Assumptions of the Standard Economic Model of Consumer Behavior People have known preferences. Full Internal Knowledge Whoever?s last name is first, alphabetically, describe the first concept to your partners as if they had never heard of it before. If we have high energy and enthusiasm, I will end class 5 minutes early? Assumptions of the Standard Economic Model of Consumer Behavior People have known preferences. People act with full information. People choose rationally so as to maximize utility. Full Internal Knowledge Full External Knowledge Maximizing Choices Now switch and the other person describes the second one. Then switch again for the third one. Advantages of the standard model From these three assumptions, consumer behavior can be modeled using beautiful, internally consistent, mathematical models. These models often correspond to actual behavior. Beautiful models? Beautiful models! More beautiful models! Beautiful models of color! Chart of attainable Pareto and Kaldor-Hicks improvements among the space of exchanges between two participants Enough beautiful models? Perhaps you prefer less ?graphic? models? Beautiful mathematical models A model of consumer utility for minivans From Petrin, A. (2002) Quantifying the benefits of new products: The case of the minivan. Journal of Political Economy, 110(4), 705-729. Advantages of the standard model From these three assumptions, consumer behavior can be modeled using beautiful, internally consistent, mathematical models. These models often correspond to actual behavior Advantages of the standard model From these three assumptions, consumer behavior can be modeled using beautiful, internally consistent, mathematical models. These models often correspond to actual behavior Advantages of the standard model From these three assumptions, consumer behavior can be modeled using beautiful, internally consistent, mathematical models. These models often correspond to actual behavior Pssst. Sometimes the basic assumptions are false Assumptions of the Standard Economic Model of Consumer Behavior People have known preferences. People act with full information. People choose rationally so as to maximize utility. Full Internal Knowledge Full External Knowledge Maximizing Choices Do people always choose rationally so as to maximize their utility? How often do people choose rationally so as to maximize their utility (or happiness)? Always and without exceptions Almost always, but with rare exceptions Usually, but there are common exceptions A little more than half the time Less than half the time Do people always choose rationally so as to maximize their utility? Work with one, two, or three others around you. How many examples can you think of where people do not choose rationally so as to maximize their utility (or happiness)? Have one person write down all the examples and write all of your names on the page. For each bad choice: Was the problem 1, 2, or 3? People have known preferences. People act with full information. People choose rationally so as to maximize utility. Full Internal Knowledge Full External Knowledge Maximizing Choices Can we model ?irrational? behavior? Yes, if it is predictably ?irrational? The study of these predictable errors that violate economic assumptions is called? Can we study ?irrational? behavior? Yes, if it is predictably ?irrational? The study of these predictable errors that violate economic assumptions is called? Behavioral economics Behavioral Economics.wmv http://www.youtube.com/watch?v=Fa-mIosWOK8