Behavioural

Amygdala

Affective brain region: memory and emotion

Striatum

Affective brain region: reward based and addictive

Insula

Analytic brain region: regulating emotions

ACC

Analytic brain region: resolving conflicts of interest

Frontal Cortex

Analytic brain region: maintenance and goal management

fMRI

brain scan observing changing oxygen levels in the brain

PET scan

Inject radioactive fluid into blood and observe brain function

EEG

measures electrical brain activity

Lesion study

Remove brain section and observe changes, operate on animals or use natural examples after accidents on humans

Pareto criterion

Welfare planners use the pareto efficient allocation

Voting Criterion

Social planners allow people to vote, assuming they correctly identify their preferred option

Utilitarian criterion

Choose the stream that maxes the sum of all utilities in the economy

Completeness

Given two lotteries you either prefer one or the other

Transitivity

If L1 > L2 and L2 > L3 then we can infer L2>L3

Risk Averse

Prefers L > (E[L},100%), occurs when utility is concave

Risk Seeking

Prefers L < (E[L},100%), occurs when utility is convex

Risk neutral

Prefers L = (E[L},100%), occurs when utility is linear

Propsect Theory EQ

V(L) = π(L(X1))*v(X1)+…+π(L(Xn))*v(Xn)

Value function

An interpretation function of a reward in a lottery It is reference dependent and loss averse. It is risk-seeking in losses and risk-averse in gains.

Probability weighting function

An interpretation of probabilities of events. Over-weights small % and under-weights large %

Narrow bracketing

Decisions are taken in isolation, or given a small sample set

Broad bracketing

Decisions are made depending on other decisions

Disposition effect

Investors hold on to losing stocks too long and sell winning stocks too fast

Endowment effect

WTA>WTP because of reference point

Ellsberg Paradox

Additivity is violated across beliefs

Conjunction fallacy

The belief of A and B happening should not be greater than the individual belief of A or B.

Law of small numbers

Extreme events appear much more likely in small sample sizes

Gamblers Fallacy

An event occurring multiple times makes beliefs over the event happening again smaller

Hot Hand Fallacy

An event occurring multiple times makes beliefs over the event happening again larger

Sure thing Principle

Basically additive beliefs

Present focused reversal

If an agent is more likely to make an action in the present than if all options were delayed by an equal amount of time

Time consistency

If a decision is always made regardless of when actions are taken

Naïve planner

Believes they have EDU, no present bias

Sophisticated planner

Knows they have QHDU

Partially naïve planner

Knows they will have QHDU but overestimates their commitment to decisions

Commitment

The most an agent is willing to pay to force themselves to complete an action in a time period

Inequality Adverse

Prefers equal outcomes

Competitive perferences

Prefers to win or not lose

Reciprocal preferences

Likes to mirror how they were treated

Welfare Hedonism

Wellbeing consists solely in the presence of pleasure and the absence of painP

Preference theory

Wellbeing consists of having preferences satisfied

Objective theories

Wellbeing is a matter of having goods and enjoying them

Standard Welfare Anlaysis

Our choices reflect our preferences, assuming they are coherent and stable

Behavioural Welfare

Preference maximisation may not explain all choices

The Happiness Function

Wit = a + BXit + uit

Easterlin Paradox

Higher incomes mean higher happiness at a point in time, but over time increasing income does not result in higher happiness

Coherence

Are beliefs transitive?

Bernheim and Rangele approach

Choices can be unambiguously preferred, but mistakes are made when frame alters decision making. These mistakes can be ignored

Framing

Context changes decision making process

Mental Accounting

Using certain mental accounts to make managaing finances easier: Consumption, Investment and Money

Net experienced utility (Hedonic benefits)

The utility from consumption minus the disutility of the cost

Net experienced payment (Hedonic costs)

The disutility from the cost minus the actual cost

Nudge

An aspect of choice architecture that alters behaviour in a predictable way

Loss aversion

Losses loom larger than gains

Regulatory Focus Theory

How people react to frames depends on their motivational orientation

Sunk cost fallacy

Failure to acknowledge inability to recover fixed costs, which affects decision making

Opportunity cost

The value of the next best foregone alternative