University Economics: Behavioral Economics and Decision Making

This homework assignment delves into key concepts within behavioral economics. It begins by defining the price mechanism and its role in determining the price of goods and services, emphasizing the influence of supply and demand, and referencing classical economic principles. The assignment then explores cognitive biases, explaining how these systematic errors in thinking can lead to deviations from rational decision-making, particularly in contexts like the stock market, highlighting heuristics and factors such as overestimation and confirmation bias. Finally, the assignment examines motivational biases, discussing how personal situations and analytical thinking can influence judgments and decisions, contrasting them with cognitive biases and providing examples like sales forecasting. The assignment is well-structured, providing a good overview of these complex topics, and is supported by relevant academic references.

Running head: BEHAVIORAL ECONOMICS
Behavioral Economics
Name of the Student:
Name of the University:
Author’s Note

1BEHAVIORAL ECONOMICS
Table of Contents
In Response to Question 1...............................................................................................................2
In Response to Question 2...............................................................................................................2
In Response to Question 3...............................................................................................................4
Reference.........................................................................................................................................5

2BEHAVIORAL ECONOMICS
In Response to Question 1
Price Mechanism is the way of determining the price of the offered products goods and
services which is affected by the overall supply of the goods and services. The price mechanism
is determined by the level of supply of goods and services which can affect the buyers and
suppliers. Classical economist is based on the principle and idea that the economy is itself based
on the fact that it is self-regulating and the price for the goods and service is determined as a
continuous process and individually by the important factors of the economy1. The natural or the
base level of GDP is always achieved by an economy that acts as the real level of achievement in
the GDP and the same is achieved by an economy when the full amount of resources are
deployed and also assumes that the employment is at optimum level2.
In Response to Question 2
Cognitive Bias refers to the non-random error occurrence while taking a systematic way
of approaching a fact or an idea. The same involves non-random way of acknowledging and
following an idea where logical way of approach was followed approaching; a solution is given
more focus than logical. Since the actual result deviates from the actual scenario, it is also
referred to cognitive bias. In simpler terms Cognitive bias occurs when the actual judgment
decisions are deviated from the original decided one, which brings out error in the final report.
Cognitive Bias usually occurs due to Heuristics or when the approach for solving a solution is
done in a faster way, which may not be feasible and the correct way for solving a solution.
1 Stigum, Bernt P. Econometrics and the philosophy of economics: Theory-data confrontations in economics.
Princeton University Press, 2015.
2 Onions, C. T., and Bertram Schefold. Essays on Piero Sraffa: Critical perspectives on the revival of classical
theory. Routledge, 2017.

3BEHAVIORAL ECONOMICS
Factors such as overestimation, over dependent on single piece of data and information and lack
of knowledge and idea can also bring out Cognitive Bias3.
The best situation where the cognitive bias can be applied is the stock market and the way
the investor invests in the asset class. The level of knowledge and the decision depend on the
logical way of approaching and finalizing a decision4. Every investor has different expectation
and level of knowledge and the investor for investments applies the same. Predicting and
applying the past event with the future, lack of knowledge, confirmation bias and having a zero
risk bias for the same are some of the factors. Sunk cost bias is the effect for the same when the
consumers are not able to completely utilize the correct data and implement the same.
In Response to Question 3
Second Bias or Motivational Bias in Behavioral Economics has shown that judgment and
decisions of people depends on various biases and expectations built up. Cognitive and
motivational or the second bias is both important in decision-making and for making important
judgments. Motivational or the second bias is usually based on the personal situation and
analytical thinking taken by one. Different decisions and different analytical judgments taken by
individual are based on a situation and condition and the same is influenced, controlled or taken
by the influence of some motivational factor. Motivational basis is different from cognitive bias
because of the fact that motivational bias deals with subconscious intuition, way and idea of
approaching a data or information5. The main cause for bringing motivational bias in the work is
3 Liedtka, Jeanne. "Perspective: Linking design thinking with innovation outcomes through cognitive bias
reduction." Journal of Product Innovation Management 32.6 (2015): 925-938.
4 Cristea, Ioana A., Robin N. Kok, and Pim Cuijpers. "Efficacy of cognitive bias modification interventions in
anxiety and depression: meta-analysis." The British Journal of Psychiatry 206.1 (2015): 7-16.
5 Frederiks, Elisha R., Karen Stenner, and Elizabeth V. Hobman. "Household energy use: Applying behavioural
economics to understand consumer decision-making and behaviour." Renewable and Sustainable Energy Reviews
41 (2015): 1385-1394.

4BEHAVIORAL ECONOMICS
to bring out efficiency level in the level of production. The chances of success increases in the
case of motivational bias where a low chance or estimation is involved but gives an expectation
of improved results. For Example: Salesmen forecast for sale of a particular unit or a product and
revising the sales target for easy target achievement6.
6 Haselton, Martie G., Daniel Nettle, and Damian R. Murray. "The evolution of cognitive bias." The handbook of
evolutionary psychology (2015): 1-20.

5BEHAVIORAL ECONOMICS
Reference
Haselton, Martie G., Daniel Nettle, and Damian R. Murray. "The evolution of cognitive bias."
The handbook of evolutionary psychology (2015): 1-20.
Cristea, Ioana A., Robin N. Kok, and Pim Cuijpers. "Efficacy of cognitive bias modification
interventions in anxiety and depression: meta-analysis." The British Journal of Psychiatry 206.1
(2015): 7-16.
Frederiks, Elisha R., Karen Stenner, and Elizabeth V. Hobman. "Household energy use:
Applying behavioural economics to understand consumer decision-making and behaviour."
Renewable and Sustainable Energy Reviews 41 (2015): 1385-1394.
Haselton, Martie G., Daniel Nettle, and Damian R. Murray. "The evolution of cognitive bias."
The handbook of evolutionary psychology (2015): 1-20.
Stigum, Bernt P. Econometrics and the philosophy of economics: Theory-data confrontations in
economics. Princeton University Press, 2015.
Onions, C. T., and Bertram Schefold. Essays on Piero Sraffa: Critical perspectives on the revival
of classical theory. Routledge, 2017.