Player 2 Player 2 almost always accepts the rejection.
Both players have the choice to reject.
Player 2 can either accept or reject the proposal.
The sum is split according to the proposal if player 2 accepts.
Neither player gets anything if player 2 rejects the proposal.
The first player doesn't have to worry about reciprocity because the game is only played once.
The ultimatum game asks player 1 to share $1,000 with player 2.
Player 1 must make a decision.
Economic theory presumes that both players want to maximize their income.
Player 1 should give the minimum of $1 to player 2 in order to maximize his gains.
The reasoning is that player 2 values $1 more than nothing and so will accept the proposal, leaving player 1 with $999.
Real people believe that fairness matters, so they are not always economic maximizers.
Player 2 would find an unfair division frustrating and reject it most of the time.
Player 1 knows that player 2 will accept an offer of $500; this division of the money is equal and therefore fair.
There is a 100% chance of a 50/50 agreement.
The chance of player 2 accepting an offer of $1 is very low.
Increasing amounts from $1 to $500 will raise the probability of an acceptance until it reaches $500.
Player 2's only decision is whether to accept or reject the proposal.
Player 2 has no control over the division.
Player 2 must reject the proposal in order to punish player 1 for being unfair.
The trade off is a complete loss of any prize.
Rejecting a proposal would cause a personal loss for player 2.
Player 2 would rather get something than nothing, so she might accept a number of unfair proposals.
Mis perceptions of probability, inconsistency in decision- making, and judgments about fairness are some of the ideas that we have presented in this section.
Risk- taking is the focus of the next section.
Not everyone evaluates risk the same way.
Economists are rethinking their models of human behavior because of this fact.
When two traders expect the same amount of money in a trade, they will reach an agreement, according to traditional economic theory.
Frans de Waal uses capuchin monkeys to argue that fairness is important in the animal kingdom.
A capuchin monkey throws a cucumber.
Risk plays a role in decision making.
The economic model of consumer choice assumes that people are willing to take risks.
People's risk tolerances are subject to change.
Economists used to think that risk- taking behavior was simple and predictable.
It's not easy to predict human behavior.
Allais developed a means of assessing risk behavior by presenting the set of choices depicted in Table 17.1, known as the Allais paradox.
People were asked to choose between gambles A and B and then between gambles C and D.
People will choose according to their risk preference.
If the participants are risk-neutral and want to maximize the expected value of the gambles, the pair B and C makes sense.
People take the sure thing when they gamble.
If they are asked to choose between C and D, we would expect them to choose D because it has a higher chance of winning.
Gamble B has a higher expected value than gamble A.
It pays $1 million if it occurs 100% of the time.
It's more difficult to calculate gamble B's expected value.
The expected value is calculated using each outcome's probability.
This means that the expected value is $5 million and the actual value is $1.39 million.
A neutral player will gamble B.
Gamble C has a higher expected value than gamble D. The expected value of Gamble D is $1 million.
A risk- neutral player who thinks at the margin will choose gambles B and C in order to maximize potential winnings from the game.
According to Allais, 30% of his research population chose gambles A and C, which are contrasting pairs.
Swift remembers her parents arguing when she was young.
She dreams of what life would be like with him.
They are running in the waves at the beach, then unpacking boxes as they move in together.
They reconcile after her boyfriend follows her.
They have two sons.
Swift reappeared from her dream and ordered food at the coffee shop in the end of the video.
Think of Taylor's dream as an example of a preference reversal.
She stays in the relationship if this is her preference.
The entire song is about finding someone who makes you risk-averse but falls for this guy so hard that you are willing to take her, and she lets her guard down and acts differently.
Allais said that a person's risk tolerance depends on his or her finances.
A person who chooses gamble A over gamble B prefers the certainty of a large financial prize over the uncertainty of the larger prize.
You forfeited the chance to win $5 million.
The choice is more like playing the lottery, since gambles C and D offer small chances of success.
People who play games of chance are more likely to get refunds quicker than people who don't.
Allais shows that people care about how much they win and how much they lose.
Preference reversals are more common than thought.
Almost 80% of income tax filers expect to get a refund because they overpaid in the previous year.
There is an opportunity cost of waiting to get money back from the government when it doesn't need to be paid in the first place.
Employees could have asked for less money from their employers.
People who wait to receive their money later have a weakly positive time preference.
People prefer to have what they want sooner rather than later.
This behavior is now seen as a preference reversal by Allais.
It was easier to analyze the contestants' strategy choices if skill was taken out of the equation.
Less skilled players may have different risk tolerances.
Each model had a briefcase with a sum of money ranging from 1 cent to $1 million.
The contestant would pick one briefcase and decide when to open the other 25 briefcases.
As cases were eliminated, a "banker" would call the host to offer a "deal" in exchange for the contestant quitting the game.
The value is approximately $131,000.
The "banker" offered a settlement based on the expected value of the briefcase as the game progressed.
The traditional model of risk behavior predicts that some contestants maximized the expected value of the briefcase while remaining risk-neutral.
You can choose between heads or tails.
You earn $2,000 if your guess is correct.
You don't earn anything if you are wrong.
$750 can be taken without the gamble.
The value of a 50/50 outcome is $1,000.
The decision to take the sure thing is evidence of risk aversion.
There is a choice between taking a sure $750 or a $3,000 prize for predicting the roll of a six-sided die.
You will roll the die.
The roll of the die is expected to be worth between $500 and $3,000.
The $750 sure thing has an expected value of $250 more.
By rolling the die, you are taking the option with a lower expected value, and how do you handle more risk.
You are a risk taker.
The move encouraged contestants to play longer so that the excitement and tension could build.
The traditional model expected some contestants to do things differently.
If contestants suffered setbacks early in the game, they took more risks, such as opening the $1 million briefcase.
Losses are implied differently by the theory.
The concept explains why some investors try to make up for losses by taking more chances rather than by maximizing the utility they receive from money.
If the screenings are expected to generate a positive buzz, movie studios will usually make a film available for review.
Movie reviews give a measure of a film's quality.
The economists studied 856 widely released movies and found that cold openings increased domestic box office revenue by 15%.
Movie openings are accompanied by a marketing campaign.
Cold openings give a natural field setting to test how rational people are.
The results are in line with the hypothesis that some people don't think low quality is indicative of a cold opening.
The cold- opened movies earned more than the prescreened ones after a number of characteristics were controlled.
The researchers found that cold- opened films did not fare better than expected once they reached foreign film or video rental markets.
The line for tickets is long.
The hypothesis is that some people don't realize that no advance review is a sign of poor quality.
The Internet Movie Database ratings for movies that were cold- opened are lower than for movies that were open.
There is a certain amount of naivete among teenagers.
In recent years, distributors have overcome their initial reluctance and opened more movies.
There is evidence that the best movie distribution doesn't depend on generating positive movie reviews.
Cold openings work because some people can't process incomplete information, even though traditional economic analysis would lead us to expect that.
The misconception that people always make rational decisions is dispelled by behavioral economics.
Behavioral economics challenges the traditional economic model and invites a deeper understanding of human behavior.
We can answer questions that span a wide range of behaviors with the help of behavioral economics.
The examples in this chapter include the opt- in or opt- out debate, the economics of risk- taking, the effects of question design, and the status quo bias.
These ideas don't fit in with traditional economic analysis.
You have learned enough to question the assumptions made in the book.
In the next chapter, we apply all of the tools we have acquired to examine one of the most important sectors of the economy-- health care and health insurance.
You are concerned about your family's security because of a recent crime wave in your community.
There is a solution that provides deterrence at an extremely low cost.
The level of security depends on how rational you expect the person to be.
A fully rational burglar would stake out a place, test for an alarm system, and choose a home that is easy to break into.
The person would gather all the information.
Criminals know that they can be seen and only a limited amount of time to choose a target, if you trim away shrubs and install floodlights.
A vehicle approaches your home.
This constraint can be a key to words if the would- be thief has incomplete information.
Behavioral economics explains how people make choices that display irrational behavior.
The concepts includeBounded rationality, misperceptions of probabilities, framing effects and priming effects, status quo bias, intertemporal decision- making, judgments about fairness, preference reversals, and prospect theory.
The behavioral approach is folded into the standard model.
People can be risk-averse or risk neutral.
Risk tolerances are assumed to be constant in the traditional economic model.
If an individual is a risk taker, he or she will take risks.
If an individual doesn't like taking chances, he or she will avoid risk.
Maurice Allais proved that many people have preference reversals.
He showed that even if some people's preferences are not constant, their decisions are not irrational.
You can give an example of each.
There is a choice between two jobs.
The job pays $50,000 annually.
You will receive an annual bonus of $25,000 if you don't know what it is.
You don't know the answer.
The university might want to maximize because the house's advantage is small.
Many voters go to the polls.
To cast their ballot for president is suggested by the office of the registrar.
The online teaching evaluations should be linked to the vote course scheduling.
Voting is important when students access the "counts".
The skeptical economist points out that with over to the teaching evaluations is a course scheduling system.
If 100 million ballots are cast, the probability that each student can opt out and go directly to any individual's vote is close the course scheduling system.
Do you think so?
There is a choice of an extra $1,000 or a gamble.
A person will place an order for a burger if he has the same expected value.
But given a choice of a loss of cally orders.
The same person prefers the gamble.
Many people give to charity.
A behavioral economist would predict an expected value of $50,000 for the first job that pays $50,000 annually.
The second system that will raise the teaching job has a base pay of $40,000 with a 30% response rate.
The annual bonus theory predicts that the response rate will be $25,000.
The expected value won't change if students opt in or out of the second job, according to the calculation.
If you are a risk-taker or risk-averse, you should not be told if you are.
Because students who access the course choose which of the two outcomes they prefer, they are forced to opt out if they survive, even though this statement is do not wish to evaluate the instructors.