## Behavioural economics

1)

a) Discuss Neo-Classical Theory and critically examine the assumptions.

b) Solve the following game as a neo-classical economist.

c) What should be the move of player I in the first node.

d) Now think like behavioural economists and analyse the game. On what factors

would the outcome of the above game actually depend?

e) Under what conditions would player I choose the move X.

2) Explain with suitable example the concept of present bias in decision making.

3) Show that the problem of missing females is also a problem of present bias in our

(societyβs) judgements.

4) Write a short note on nudge. Give examples and illustrate how can it be used in public

policy spaces.

5) Show that reciprocity and patience are precondition for cooperation to hold between

two parties.

6) What are heuristics? Write a short note on (Give suitable examples)

i) Representativeness

ii) Availability

iii) Anchoring and adjustment

7) Discuss the problem of low Female Labour Force participation as a behavioural

problem.

8) Formalise a choice problem under bounded rationality where behaviour is a function of

pears behaviour.

9) What determines the plan horizon of an agent. Illustrate using a suitable model.

10) In a class experiment two options were given:

a) Option A is a guaranteed return of Rs100

b) Option B is where one gets Rs 1000 if head comes in a coin toss or else 0.

What is the expected payoff from option B?

80% students choose option A, even though expected payoff of option B is greater

than the payoff from choosing A. What is the reason?

11) What is system1 and system2 type of thinking?

12) Describe using a game theoretical model the concept of fairness.

13) Two people decide to meet at a pre-decided venue between 6 to 7PM. Both are equally

likely to come at the venue at any time between 6 to 7PM. If they trust the other person

they will wait for some time before they leave. Trace the relationship between the

probability that they meet with trust.

14) What are the types of biases that may arise due to the following heuristics:

i) Representativeness

ii) Availability

iii) Anchoring and adjustment

15)

Consider the following static optimisation of making a choice between two paths,

red or blue. The red path gives a payoff of 8 while blue gives a payoff of 7.

Formally we may write the problem as:

Now consider the following dynamic problem:

There are 3 agents A, B, C.

A makes a decision till time = 2; B makes the decision till time = 4; and, C makes the

decision till time = 6. Their maximum value functions are given by

Vπ΄

(t = 0) = max

{ππ‘

}

β π(ππ‘)

2

π‘=0

Vπ΅(t = 0) = max

{ππ‘

}

β π(ππ‘)

4

π‘=0

VπΆ

(t = 0) = max

{ππ‘

}

β π(ππ‘)

6

π‘=0

Find, Vπ΄, Vπ΅, VπΆ and optimal path, {ππ‘

} for each.

Why is the path different for each candidate?

π(π) = ΰ΅ π π {πΉππ
, π©πππ}

8 ππ πΉππ

7 ππ π©πππ

Arππππ₯ π(π) = πΉππ

π( π΄ ) = max

π

π(π) = π , π€βπππ π(. ) ππ π‘βπ πππ₯πππ’π π£πππ’π ππ’πππ‘πππ

16)Consider the above dynamic problem for candidate D and E, whose value function is

given by Vπ·( π‘ = 0) = max

{ππ‘

}

β π½π·

π‘π(ππ‘

)

6

π‘=0 and VπΈ

( π‘ = 0) = max

{ππ‘

}

β π½πΈ

π‘π(ππ‘

)

6

π‘=0

respectively, where π½π· = 0.2 and π½πΈ = 0.8

Find Vπ·, VπΈ and optimal path, {ππ‘

} for each.

17) X and Y are two individuals who have the following hypothesis regarding workforce

participation of females:

log (

π

1βπ

) = π½0 + π½1πππ’ , π€βπππ π ππ π‘βπ ππππππππππ‘π¦ ππ π ππππππ π‘π π€πππ;

π½0 = β4.11 πππ π½1 = 0.48

Xβs mother is working while Yβs mother is a housewife. Therefore, X has a prior belief

that π = 0.8 and Y has a prior belief that π = 0.15. They both are friends now and

therefore are exposed to similar types of people around them. They observe education

level as well as working status of their 10 female friends. This leads to an update of

their believe over hypothesis. Table shows their observation. Find the updated

probability of hypothesis for each X and Y respectively, given their observation.

Status Education

Working 15

N