## 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
(society’s) 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
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
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
V𝐴
(t = 0) = max
{𝑐𝑡
}
∑ 𝑈(𝑐𝑡)
2
𝑡=0
V𝐵(t = 0) = max
{𝑐𝑡
}
∑ 𝑈(𝑐𝑡)
4
𝑡=0
V𝐶
(t = 0) = max
{𝑐𝑡
}
∑ 𝑈(𝑐𝑡)
6
𝑡=0
Find, V𝐴, V𝐵, V𝐶 and optimal path, {𝑐𝑡
} for each.
Why is the path different for each candidate?
𝑈(𝑐) = ൜ 𝑐 𝜖 {𝑹𝒆𝒅 , 𝑩𝒍𝒖𝒆}
8 𝑖𝑓 𝑹𝒆𝒅
7 𝑖𝑓 𝑩𝒍𝒖𝒆
Ar𝑔𝑚𝑎𝑥 𝑈(𝑐) = 𝑹𝒆𝒅
𝑉( 𝐴 ) = max
𝑐
𝑈(𝑐) = 𝟖 , 𝑤ℎ𝑒𝑟𝑒 𝑉(. ) 𝑖𝑠 𝑡ℎ𝑒 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛
16)Consider the above dynamic problem for candidate D and E, whose value function is
given by V𝐷( 𝑡 = 0) = max
{𝑐𝑡
}
∑ 𝛽𝐷
𝑡𝑈(𝑐𝑡
)
6
𝑡=0 and V𝐸
( 𝑡 = 0) = max
{𝑐𝑡
}
∑ 𝛽𝐸
𝑡𝑈(𝑐𝑡
)
6
𝑡=0
respectively, where 𝛽𝐷 = 0.2 and 𝛽𝐸 = 0.8
Find V𝐷, V𝐸 and optimal path, {𝑐𝑡
} for each.
17) X and Y are two individuals who have the following hypothesis regarding workforce
participation of females:
log (
𝑝
1−𝑝
) = 𝛽0 + 𝛽1𝑒𝑑𝑢 , 𝑤ℎ𝑒𝑟𝑒 𝑝 𝑖𝑠 𝑡ℎ𝑒 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑎 𝑓𝑒𝑚𝑎𝑙𝑒 𝑡𝑜 𝑤𝑜𝑟𝑘;
𝛽0 = −4.11 𝑎𝑛𝑑 𝛽1 = 0.48
X’s mother is working while Y’s mother is a housewife. Therefore, X has a prior belief
that 𝑝 = 0.8 and Y has a prior belief that 𝑝 = 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