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• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Dedication Page
• Table of Contents Page
• Empirical Evidence from the Field, by Topic Page
• Note to Instructors Page
• Acknowledgements Page
• Part I Foundations
• 1 Introduction
• 1.1 Why Study Behavioral Economics?
• 1.2 Why Behavioral Economics Now? A Brief History
• 1.3 A Roadmap for the Book
• 1.3.1 Structure
• 1.3.2 Topics
• 1.4 Empirical Methods
• 1.4.1 Testing an Economic Theory
• 1.4.2 Identifying Causality
• 1.4.3 Experimental Data
• 1.5 Summary
• References
• 2 Standard Decision Making
• 2.1 The Decision Problem
• 2.2 Decision Making Over Time
• 2.2.1 Time Discounting
• 2.2.2 Constant Discounting
• 2.2.3 Time Consistency
• 2.3 Decision Making with Uncertainty
• 2.3.1 Describing Uncertainty
• 2.3.2 Evaluating Uncertainty
• 2.3.3 Risk Preferences
• 2.3.4 The Expected Utility Model
• 2.4 Standard Model of Individual Decision Making
• 2.5 Rational Behavior
• 2.6 Summary
• 2.7 Exercises
• References
• 3 Behavioral Welfare Economics
• 3.1 Welfarism
• 3.2 Welfare of Standard Decision Making
• 3.3 Internalities
• 3.3.1 Welfare Loss of an Internality
• 3.3.2 Paternalistic Taxation
• 3.4 Nudges
• 3.4.1 Defining Nudges
• 3.4.2 How Nudges Work
• 3.4.3 Advantages of Nudging
• 3.4.4 Disadvantages of Nudging
• 3.5 Health Mistakes
• 3.5.1 Choosing Health Care
• 3.5.2 Choosing Health Insurance Plans
• 3.6 Energy-Efficient Light Bulb Underuse
• 3.7 Summary
• 3.8 Exercises
• References
• Part II Intertemporal Preferences
• 4 Discounted Utility Model Anomalies
• 4.1 Time Effects
• 4.1.1 Preference Reversals
• 4.1.2 Hyperbolic Discounting
• 4.1.3 Poverty and Discounting
• 4.2 Magnitude Effect
• 4.3 Sign Effect
• 4.4 Preference for Improving Sequences
• 4.5 Life-Cycle Model
• 4.5.1 Preferences
• 4.5.2 Budget Constraint
• 4.5.3 The Solution
• 4.5.4 Implications
• 4.5.5 Life-Cycle Evidence
• 4.6 Summary
• 4.7 Exercises
• 4A Appendix: The Calculus of the Life-Cycle Model
• 4A.1 Appendix Summary
• 4A.2 Appendix Exercises
• References
• 5 Present Bias
• 5.1 Present-Biased Preferences
• 5.1.1 Quasi-Hyperbolic Discounting
• 5.1.2 Time Inconsistency
• 5.1.3 Welfare with Present Bias
• 5.2 Consumption of a Good
• 5.3 Doing it Once
• 5.3.1 Model Setup
• 5.3.2 Examples
• 5.3.3 General Results
• 5.3.4 Welfare
• 5.4 Empirical Evidence of Present Bias
• 5.4.1 Exercise
• 5.4.2 School Work
• 5.4.3 Present-Biased Life-Cycle Evidence
• 5.4.4 Credit Card Take-Up
• 5.5 Summary
• 5.6 Exercises
• 5A Appendix: The Calculus of the Present-Biased Life-Cycle Model
• 5A.1 Appendix Summary
• 5A.2 Appendix Exercises
• References
• 6 Consumption Dependence
• 6.1 Habit Formation
• 6.2 Drug Use
• 6.3 Empirical Evidence of Habit Formation
• 6.3.1 Voting Habits
• 6.3.2 Tobacco
• 6.4 Anticipation
• 6.5 Anticipation Explanations of Anomalies
• 6.5.1 Sign Effect
• 6.5.2 Timing of Outcomes
• 6.6 Empirical Evidence of Anxiety
• 6.6.1 Avoiding Health Information
• 6.6.2 Stock Market Fluctuations
• 6.7 Summary
• 6.8 Exercises
• References
• 7 Market & Policy Responses to Present Bias
• 7.1 Two-Part Tariffs
• 7.1.1 Pricing for Time-Consistent Consumers
• 7.1.2 Pricing Investment Goods for Present-Biased Consumers
• 7.2 Defaults
• 7.2.1 Suggested Tips
• 7.2.2 Organ Donations
• 7.2.3 Retirement Savings
• 7.3 Nudging and Taxing Sin Goods
• 7.3.1 Welfare with Sin Goods
• 7.3.2 Nudging Dessert
• 7.3.3 Sin Taxes
• 7.4 Summary
• 7.5 Exercises
• References
• Part III Reference-Dependent Preferences
• 8 Reference-Independence Anomalies
• 8.1 Endowment Effect
• 8.1.1 Early Evidence from the Lab
• 8.1.2 Further Evidence from the Field
• 8.2 Coding Lotteries
• 8.2.1 Recoding a Lottery
• 8.2.2 Aversion to Small-Stakes Lotteries
• 8.3 Equity Premium Puzzle
• 8.3.1 Returns and Investments
• 8.3.2 The Equity Premium
• 8.3.3 The Puzzle
• 8.4 Summary
• 8.5 Exercises
• 8A Appendix: The Math of Absurd Lottery Preferences
• References
• 9 Reference Dependence
• 9.1 Reference-Dependent Preferences
• 9.1.1 Gain-Loss Utility
• 9.1.2 A Model of Reference-Dependent Preferences
• 9.2 Application: Endowment Effect
• 9.2.1 Endowment-Based Reference Points
• 9.2.2 Expectations-Based Reference Points
• 9.3 Application: Aversion to Small-Stakes Lotteries
• 9.3.1 Expected Gain-Loss Utility
• 9.3.2 Revisiting Absurd Lottery Preferences
• 9.3.3 Loss Aversion vs. Risk Aversion
• 9.4 Application: Equity Premium Puzzle
• 9.5 Empirical Evidence of Reference Dependence
• 9.5.1 Targeting Income
• 9.5.2 Job Search Effort
• 9.5.3 Life-Cycle Consumption Expectations
• 9.6 Summary
• 9.7 Exercises
• 9A Appendix: The Math of Random Reference Points
• 9A.1 Appendix Exercises
• References
• 10 Market & Policy Responses to Loss Aversion
• 10.1 Welfare Interpretations of Loss Aversion
• 10.2 Reusable Bag Use
• 10.2.1 Background and Evidence
• 10.2.2 Modeling Loss Averse Shoppers
• 10.2.3 Explanations Beyond Loss Aversion
• 10.3 Teacher Compensation
• 10.4 Worker Bonuses
• 10.5 Auctions
• 10.5.1 Auction Types
• 10.5.2 Auction Revenue with Standard Bidders
• 10.5.3 Auction Revenue with Loss Averse Bidders
• 10.6 Summary
• 10.7 Exercises
• References
• Part IV Preferences over Uncertainty
• 11 Expected Utility Anomalies
• 11.1 Anomalies with Objective Probabilities
• 11.1.1 Allais Paradox
• 11.1.2 Reflection Effect
• 11.1.3 Overweighting Unlikely Outcomes
• 11.2 Ellsberg Paradox
• 11.3 Summary
• 11.4 Exercises
• References
• 12 Non-Expected Utility
• 12.1 Prospect Theory
• 12.1.1 Diminishing Sensitivity
• 12.1.2 Probability Weighting
• 12.2 Application: Anomalies with Objective Probabilities
• 12.2.1 Allais Paradox
• 12.2.2 Reflection Effect
• 12.2.3 Overweighting Unlikely Outcomes
• 12.3 Empirical Evidence of Probability Weighting
• 12.3.1 Insurance
• 12.3.2 Lotteries
• 12.4 Maxmin Expected Utility
• 12.5 Application: Ellsberg Paradox
• 12.6 Personal Finance with Ambiguity Aversion
• 12.6.1 The Logic of Ambiguity Aversion
• 12.6.2 Empirical Evidence of Ambiguity Aversion
• 12.7 Summary
• 12.8 Exercises
• References
• Part V Social Preferences
• 13 Self-Interested Preference Anomalies
• 13.1 Giving in the Field
• 13.1.1 Philanthropy
• 13.1.2 Tipping
• 13.2 Giving in the Lab
• 13.2.1 Dictator Game
• 13.2.2 Ultimatum Game
• 13.2.3 Public Good Game
• 13.3 Summary
• 13.4 Exercises
• References
• 14 Social Preferences
• 14.1 Altruism
• 14.1.1 Modeling Altruistic Philanthropy
• 14.1.2 Evaluating Altruistic Philanthropy
• 14.2 Warm-Glow Giving
• 14.3 Distributional Preferences
• 14.3.1 Modeling Distributional Preferences
• 14.3.2 Distributional Preferences in Lab Games
• 14.4 Reciprocity
• 14.4.1 Ultimatum Game
• 14.4.2 Gift Exchange
• 14.5 Social Pressure
• 14.5.1 Modeling Social Pressure
• 14.5.2 Social Pressure in the Field
• 14.5.3 Social Norms
• 14.6 Summary
• 14.7 Exercises
• References
• 15 Market & Policy Responses to Social Preferences
• 15.1 Employers
• 15.1.1 Worker Effort under Pressure
• 15.1.2 Pay Transparency
• 15.2 Unemployment
• 15.3 Optimal Taxation
• 15.3.1 Welfare Interpretations of Social Preferences
• 15.3.2 Three Tax Policies
• 15.4 Social Pressure and Norms as Policy
• 15.4.1 Voting Pressure
• 15.4.2 Tax Collection
• 15.5 Summary
• 15.6 Exercises
• References
• Part VI Beliefs
• 16 Belief Anomalies
• 16.1 Overconfidence
• 16.1.1 Overestimation
• 16.1.2 Overplacement
• 16.1.3 Overprecision
• 16.2 Confirmation Bias
• 16.3 Representativeness
• 16.3.1 Gambler’s Fallacy
• 16.3.2 Extrapolative Beliefs
• 16.3.3 Base-Rate Neglect
• 16.4 Summary
• 16.5 Exercises
• References
• 17 Nonstandard Beliefs
• 17.1 Overconfidence in Business and Finance Decisions
• 17.1.1 Entrepreneurial Entry
• 17.1.2 Managerial Mergers
• 17.1.3 Investor Trading Volume
• 17.2 Nonstandard Belief Updating
• 17.2.1 Law of Small Numbers
• 17.2.2 Base-Rate Neglect
• 17.3 Extrapolative Beliefs in Financial Markets
• 17.3.1 Empirical Facts and Evidence
• 17.3.2 Asset Prices with Extrapolative Beliefs
• 17.4 Summary
• 17.5 Exercises
• References
• 18 Market & Policy Responses to Nonstandard Beliefs
• 18.1 Welfare with Nonstandard Beliefs
• 18.2 Overconfident Employees
• 18.2.1 A Compensation Puzzle
• 18.2.2 Exploitation via Stock Options
• 18.3 Overconfident Consumers
• 18.3.1 Exploitation via Complex Pricing
• 18.3.2 Protection via Public Policy
• 18.4 Social Insurance
• 18.4.1 Optimal Social Insurance
• 18.4.2 Optimal Unemployment Insurance Benefits
• 18.4.3 Optimal Health Insurance Copays
• 18.5 Summary
• 18.6 Exercises
• References
• Part VII Decision Processes
• 19 Mental Accounting
• 19.1 An Introduction to Mental Accounting
• 19.1.1 Examples of Mental Accounting
• 19.1.2 Features of Mental Accounts
• 19.1.3 Mental Accounting in this Chapter
• 19.2 Sunk Costs
• 19.3 Mental Accounting over the Life Cycle
• 19.3.1 A Mental Accounting Life-Cycle Model
• 19.3.2 Income Accounts
• 19.3.3 Wealth Accounts
• 19.4 Excess Diversification
• 19.5 Summary
• 19.6 Exercises
• References
• 20 Inattention
• 20.1 A Framework for Inattention
• 20.2 Evidence of Inattention
• 20.2.1 Inattention to Prices in Auctions
• 20.2.2 Inattention to Taxes
• 20.2.3 Inattention to Non-Leading Digits
• 20.2.4 Inattention in Finance
• 20.3 Persuasion
• 20.3.1 Persuading Investors
• 20.3.2 Persuading Voters
• 20.4 Summary
• 20.5 Exercises
• References
• 21 Market & Policy Responses to Mental Accounting & Inattention
• 21.1 Mental Accounting: Selling Strategies
• 21.1.1 Transaction Utility
• 21.1.2 Payment Decoupling
• 21.1.3 Gift Giving
• 21.2 Mental Accounting: Savings Policy
• 21.3 Shrouding Add-on Prices
• 21.3.1 Unshrouding in the Standard Model
• 21.3.2 Shrouding with Inattention
• 21.3.3 Regulation
• 21.4 Nudging Attention
• 21.4.1 Health
• 21.4.2 Education
• 21.4.3 Government Income Support Programs
• 21.5 Government Persuasion
• 21.5.1 Education Curriculum
• 21.5.2 Radio Communication
• 21.6 Summary
• 21.7 Exercises
• References
• Index