Economics Assignment: Behavioral Economics and Decision Making

This assignment explores key concepts in behavioral economics through a series of questions and answers derived from a video lecture. It contrasts classical and behavioral economics, defines scarcity and its impact on personal finance, and analyzes the car repair-IQ experiment. The assignment delves into financial fragility, the neurological basis of pleasure in consumer choices, and the endowment effect. Topics include overconfidence, confirmation bias, loss aversion, the impact of choice architecture, and the power of defaults in areas such as organ donation and 401k participation. It concludes with a discussion of longevity risk and personal reflections on the video's content, providing a comprehensive overview of the principles of behavioral economics and their implications for decision-making.

1. What is the primary difference between “classical economics” versus “behavioral
economics”? (In other words, what element/field of study is added to the mix?)
Classical economics is connected with the theory of value and distribution
behavioral economics is another economical area that links the theories of economics
with human psychology. This model assumes the people to be rational.
2. Describe the concept of “scarcity” and its implications on personal finance.
Scarcity is a fundamental economic problem that occurs as the wants of peoples are
unlimited with limited amount of resources. It is due to scarcity, multiple economical
decisions are required to be made so that resources are allocated efficiently. Regarding
the impact of scarcity on personal finance, it can be commented that due to limited
amount of finance the individuals are required to carry out decisions so that resources are
allocated efficiently.
3. Note the car repair-IQ experiment. Although the IQ measurements were 100 for both
parties for the $150 repair, what happened to the lower income group when hit with a
$1500 repair? In other words, the IQ points dropped to what number during the game?
When the lower income group is charged with a $1500 repair, the lower income group
got an 87 IQ points. As the lower income group are preoccupied by financial challenges
that are observed to be complex for the same group to manage.
4. on the topic of Financial Fragility: what % of families could not come up with $2,000
within 30 days? And what is the antidote for this?
Taking into consideration a standard percentage of 75% of dollar in terms of Financial
Fragility. Moreover, the families with $2,000 within 30 days is 75%. The antidote of this
is to set aside the other obligations of life and to take the finance as core activity.
5. Dr. Baba Shiv of Stanford University conducted a wine tasting experiment using FMRI
brain scans. What part of the brain did he mention is responsible for signaling pleasure?
The area that Dr. Baba Shiv of Stanford University mentioned while conducting a wine
tasting experiment using FMRI brain scans revealed that the area named as ventral
medial prefrontal cortex for an individual.

6. What was the outcome of the wine tasting vs. the price point? (Which price point won
the MRI test?)
In the experiment of wine tasting vs. the price point the results reveal that the areas that
experience the expensiveness are more active when the testing is performed for high
price wine.
7. According to Shiv, in a battle between the “emotional brain” and the “rational brain”,
which will almost always win?
The rational part of brain is concerned with the emotional part of brain for a particular
period of time. The rational part of brain enable the individuals to do activities that other
species of animal are unable to do. Moreover, the emotional part is connected with the
love and affection area of an individual.
8. What large store chain was described as an example of leveraging from the
“endowment effect” of human behavior? (Furniture that requires assembling, thus
becoming more vested in the outcome.)
In the area of the video where a couple assembles the different parts of furniture. Dr.
Baba Shiv of Stanford University called this the endowment effect where a high amount
of value is invested on the things that have been invented.
9. Dalian Cain of Yale University described the concept of overconfidence—what does
this mean?
Dalian Cain of Yale University described the concept of overconfidence as the time in
which an individual looks at a mirror and thinks over and over in convincing himself. The
individual thinks that he is so smart and too good at a particular or all general activities.
10. Cain also talked about a close cousin, called Confirmation Bias—what happened
during the illusion of the lady lip-reading?
Confirmation Bias is the potential of an individual to decode new set of evidence as
corroboration of an individual’s existing principles or models.
11. What is loss aversion (think coffee mug example)?
In economics, the concept of loss aversion denotes the tendency of individual to intensely
choose evading losses in case of acquisition of gains. Multiple studies recommend that
and losses damages are twofold as commanding, sensitively, as gains.
12. On the jam sample experiment, which table sold the most jars of jam, the one with 24
options or the one with only 6?

The table stand in the third place sold the most number of jars of jam.
13. What happened in 401k participation as the number of investment choices rose?
The percentage has been increased up to 250% in case of 401k participation as the
number of investment choices rose.
14. Give an example of Choice Architecture (at least a couple of examples were
mentioned)
Take the example of shopping cart particularly in the few generations, the size of trolleys
has been increased by a percentage of 30% so that more items can be placed without the
problem of empty trolley.
15. Regarding the Power of Defaults concept, what happened in Europe with organ donor
rates, since Europe basically had an opt-out default option?
The rates has been noted at a percentage of 6.6%.
16. Think about the Power of Defaults with respect to 401k retirement accounts in the
United States—what method was used in order to have a higher participation rate?
The method used in order to have a higher participation rate was making the economies
generally understand the benefits of participation.
17. Also on the above topic, what is it called when the 401k plan automatically raises the
amount of the employee contribution levels?
When the 401k plan automatically raises the amount of the employee contribution levels,
the event is called automating.
18. What is Longevity Risk?
Longevity risk means the risk of a retiring person outlasting his retirement benefits.
19. Name one thing you found interesting about the video.
The interesting thing about the video is that a number of scholars and lecturers were
brought under the same roof to clear the idea of finance.
20. If you watched the entire video, please write “completed” below.
Completed