econ 2/2

Introduction to Preferences and Choices

  • Understanding Preferences:

    • Preferences are subjective evaluative attitudes towards options, influencing decisions.

    • Examples of preferences include likes and dislikes, covering both needs and wants.

    • Loosely Using the Definition of "Like":

    • Examples such as Taylor Swift concerts and consistent class attendance show variance in what people enjoy.

Personal Experience with Preferences

  • Choice and Consumption:

    • Decisions on what to consume (e.g., drinks) are influenced by personal preferences.

    • Example of Drinking Water:

    • Personal dislike for water contrasted with its necessity for health (hydration).

    • Preference for juice due to taste leads to its consumption despite high sugar content.

    • Purchasing new water bottles periodically serves as motivation for better hydration habits.

Concept of Preferences in Behavioral Context

  • Well-Behaved Preferences:

    • Preferences are structured to be logical and consistent over time.

    • Assumptions for Logical Preferences:

    • For preferences to be deemed logical, they should not be random or chaotic (e.g., objects not being put back into a toy box).

Neoclassical vs. Behavioral Economics

  • Behavioral Economics:

    • Concept that preferences and choices can be influenced by various factors.

    • Neoclassical economists assume individuals know their true preferences without external influence.

    • Influence of External Factors:

    • Suggestions arise that personal choices may not be entirely free from bias or influence.

Assumptions for Preferences

  • Main Assumptions for Preferences:

    1. Completeness:

    • Individuals must be able to express their preference between any two options.

    • Example: Liking bagels but being indifferent to English muffins could apply beyond food (e.g., clothing or activities).

    • Importance of Completeness:

      • Enables clarity in preferences and decision-making.

    1. Transitivity:

    • If A is preferred over B and B is preferred over C, then A must be preferred over C.

    • Example: Preferences among food items like bagels, English muffins, and toast must follow this logical structure.

    1. Reflexivity:

    • Each bundle is as good as itself (bundle x is equivalent to bundle x).

    • Example: Enjoyment of bagels should be consistent upon multiple consumptions unless influenced by external factors.

Potential Flaws in Preference Evaluation

  • Changing Opinions Over Time:

    • The subjective nature of preferences can lead to inconsistencies when evaluating choices (e.g., liking an outfit on one occasion but not the next).

  • Impact of External Circumstances:

    • Various external conditions can alter how one feels about a choice (e.g., disagreeable dining experiences affecting perception of a restaurant).

Additional Preference Assumptions

  • Frequent Assumptions Setup:

    • Relative rankings of options must remain intact regardless of context.

    • Factor Cancellation:

    • Irrelevant factors should not affect decision-making.

    • Example: Regardless of weather conditions (heat), the choice between playing golf or volleyball should be based on the merits of these activities alone, not the common external discomfort.

Conclusion

  • Class Structure Note:

    • Upcoming class session will include assignments focusing on examples of preferences, quizzes, and discussions to further comprehend behavioral economics.

    • Acknowledgment of volunteers in providing assistance and the value of student engagement in the learning process.

    • Encouragement of additional contributions to class discussions.