EC3450
Summer Examinations 2020/21
Behavioural Economics: Theory and Applications
Section A: Answer ALL FOUR Questions
1. The Endowment effect is a manifestation of loss aversion. Comment on this statement. (18 marks)
2. Describe, with examples, the main principles behind the shape of the Value Function and Weighting function in Prospect Theory. (18 marks)
3. (a) What is overinference and how might this phenomenon be generated by a mistaken belief in a law of small numbers, such as in Rabin (2002)? When might the same belief instead lead to the gamblers’ fallacy? (12 marks)
(b) Explain what is meant by fictitious variation. (6 marks)
4.
(a) For either: (i) the Travellers’ dilemma game
or (ii) the Minimum Effort coordination game
from Goeree and Holt (2001), explain the prediction of analytical game theory and describe how observed behaviour differs from such predictions. (9 marks)
(b) Why do Charness and Rabin (2002) consider it useful to explore a rich set of experimental games with systematically altered payoff structures? Include reference to at least one particular case of confounding explanations. (9 marks)
Section B: Answer ONE Question
5.
(a) What are pharmacological methods used in Neuroeconomics? Outline its limitations. (5 marks)
(b) In the paper titled ‘Oxytocin increases trust in humans’, Kosfeld et al. (2005) investigate the effect of a neurohormone on prosocial behaviour. Describe their study and results in detail. (18 marks)
(c) Why did the authors conduct the ‘risk experiment’ along with the trust experiment in their study? (5 marks)
6.
(a) What are the three key assumptions of the Discounted Utility Model? (7 marks)
(b) For each of the three assumptions, give an example of how it can be violated and suggest an alternate model from behavioural economics. (21 marks)
7.
(a) On what basis might Subjective Well-Being (SWB) data contain useful information? Briefly discuss some advantages and drawbacks of using such data in policy evaluation. (8 marks)
(b) What do the results of Benjamin et al (2012) imply for the question of whether anticipated SWB is the only goal of choice? (10 marks)
(c) Describe the principal findings of Deaton and Kahneman (2010) regarding the relationship between income and SWB, including the relevance of different SWB measures. (10 marks)
8.
(a) Discuss the evidence of Chetty et al (2014) regarding the relative merits of changes in defaults in contrast to subsidies for increasing retirement savings. (14 marks)
(b) What does the grocery store experiment in Chetty et al (2009) suggest about the importance of tax salience, and how is this reinforced by observational evidence from alcohol consumption? (14 marks)