Batch 2 - Class 282 - Behavioral Economics II

• In "Filling the Grid" what if its a 3xn grid, with following tiles: 3x2 L and dots - how many ways of filling the grid are there?
• Answer: Note that it is likely that the problem above has 2x2 L (and not 3x2) - with that https://cs.uwaterloo.ca/journals/JIS/VOL10/Heubach/heubach40.pdf provides a comprehensive analysis.

• Lets play a game. Each of you get five coins of Rs 1 each. Now you can contribute any amount you wish to a pot anonymously. Once everyone has contributed, the amount in the pot will be doubled and distributed equally among all players. You want to maximize the amount of money you are left with.
• We noticed that while classical economics would dictate that everyone contributing 0 is the Nash Equilibrium, humans often continue to donate non-zero values. This is an example where behavioral economics differs from classical "optimization" economics.

• Aarushi's poser: Pick a number for a lottery. If you pick n, you have chances of winning n with probability of 1/n. What would you pick?
• Vansh's rejoinder: "I would pick differently if you allowed me to play the games a million times"
• Consider the following and choose one option in each problem:
• Problem 1: Assume you are richer by Rs 10000 than today. You are offered a choice of (a) a sure gain of Rs 2000, or (b) a 50% chance to gain Rs 4000, and 50% chance to gain 0
• Problem 2: Assume you are richer by Rs 14000 than today. You are offered a choice of (a) a sure loss of Rs 2000, or (b) a 50% chance to lose Rs 4000 and 50% chance to lose 0
• Which one do you pick. In experiments, 1a (72%), 1b (28%), 2a (36%), 2b (64%). Why?
• Explain classical "value function" - the value of incremental money decreases with amount of money you already own
• If you already have a million dollars, the value of incremental $10000 is low, relative to if you had only $10000 to start with
• However, behavioral economists realized that value is not just diminishing with absolute money you have, but with the change in money itself
• Even if you have a million dollars, a $5000 bonus feels good. But $10000 is not twice as good as the $5000 (plot the curve)
• What should be the pain of a Rs 2000 loss, relative to the joy of Rs 2000 gain? Let kids guess and opine on their own 
• Can we tell using the data we collected above? (Use kids' data if it is in the ballpark, else use prior data)
• We feel roughly 2x the pain of loss, relative to joy of an equivalent gain.

• This is also called Loss-Aversion theory. Why?
• Why did more people choose 1a versus 2a? Why are people willing to accept less risk on gains, and more risk on losses? These are both explained by the same utility curve. Our ability to take higher risk to prevent losses is essentially "Loss Aversion"
• Now lets come back to Aarushi's poser. What would you choose - lets tabulate.
• Aarushi also referred to https://mathwithbaddrawings.com/2021/05/18/your-probabilistic-personality/ as different personality type. Lets match against that to assign personalities to people (just for fun)
• Do you buy Vansh's argument that he would play differently if he could play multiple games, say 100?
• If yes, then what should be Vansh's choice in playing the 100th game (after having played 99?)

• Suppose you have won a concert ticket in a raffle, the ticket for which costs you Rs 5. On the match day, its raining and you are not fancying the trip to watch the concert. What will you do?
• What if you had bought this ticket for Rs 1000 cash?
• What if someone had given you the ticket for free?
• Standard economic theory suggests that because both Rs 5 and Rs 1000 are sunk costs, people should ignore that.
• However, most people differentiate between the two scenarios. Why?
• It is Endowment Effect. Not using a ticket you have feels like a loss. 

• Suppose you have a tennis ball autographed by Nadal, that you purchased for Rs 10000. In the market, people are willing to pay Rs 25000 for the autographed ball. However, you have decided to use it. Which of the following describes your feeling regarding the cost of the ball? (Values in brackets are reference experimental responses)
• 0, I already paid for it [30%]
• Rs 10000, what I paid for it [25%]
• Rs 25000, what I could get if I sold the ball [20%]
• -Rs 15000, I get to use a ball thats worth Rs 25000 for just Rs 10000 [25%]
• Which of these is "correct" from classical economics perspective? Rs 25000. However, most people believe that they are paying zero or actually saving money! 

• Can you tile a 6x6 grid with 2x1 dominos, so that there are no fault lines (i.e. any horizontal or vertical line has at least one dominos going across it?)
• Answer: Can't be done - each of 10 lines in 6x6 grid divides the region into two even areas, so at least two dominoes must cross it. So there must be at least 20 dominoes, but there are only 18