Week8 - Why our Emotions are more Rational than we Think

• explain mental equilibrium

  there is a difference between material preferences and mental preferences.

  
  

  players choose their mental preferences and play a Nash equilibrium with respect to those preferences

  
  

  mental preferences are not arbitrary - they are there to maximise material payoffs
• define and explain Smiths Percepts

  i. non-satiation : assuming no costs, subjects need to choose the highest available reward

  ii. saliency : subjects need to have an incentive to reveal their true preferences - if the higher the outcome the higher the reward then saliency is satisfied

  iii. dominance : rewards and experimental structure should dominate the agents attention and costs associated with the experiment

  iv. privacy : subjects payoffs and preferences should be private, otherwise they may hide their true preferences

  v. parallelism : the environment and rules should simulate real world (internal validity)
• is the validity of monetary rewards greater than that if hypothetical rewards


  hypothetical rewards have not been found to differ from incentive-compatible experiments

  
  

  (Coller and Williams, 1999)

  (Johnson and Bickel, 2002)
• what is the difference between within and between comparison designs


  within - testing different treatments with the same subjects

  
  

  between - testing different treatments through different groups
• what are the advantages and disadvantages of within and between comparison designs

  within:

  advantage - more suitable when research questions focus on elements which can vary across individuals

  disadvantage - more likely to violate dominance and internal validity

  
  

  Between:

  advantage - simple

  disadvantage - need for larger samples and potential for sample bias
• what are the 4 types of auctions

  i. First-Price Sealed Bid

  ii. Second-Price Sealed Bid (AKA Vickrey)

  iii. English

  iv. Dutch
• explain and give an example of FPSBA

  - private bids

  - winner pays their bid

  - no dominant strategy

  
  

  examples: concession agreements
• explain and give an example of SPSBA

  - private bids

  - winner pays the second highest bid

  - incentive to bid true valuation

  
  

  examples: telecommunications spectrum auctions
• explain and give an example of English auctions

  - ascending bids

  - incentive to bid only up to valuation

  
  

  examples: art auctions
• explain and give and example of Dutch Auctions

  - descending bids

  - more likely to bid way above or below valuation as its highly influenced by others actions

  
  

  examples: US treasury bonds and IPO's
• explain nudging policies

  interventions designed to take advantage of cognitive biases for altering behaviours in a cost-effective way
• give three examples of nudging policies and explain them

  i. hypothecation - earmarking tax revenues for specific purposes (Advani et al., 2011)

  
  

  ii. opt-in vs opt-out - higher consent for organ donation when default option is opt-out (Johnson & Goldstein, 2003)

  
  

  iii. Save more tomorrow - default saving rate options with automatic increases linked to future pay rises significantly increase employees savings rates for pension schemes (Bernatzi & Thaler, 2004)