18 votes

How does Black Friday work?

Gary Becker's work on Social Demand probably has something to do with the phenonmena. Becker basically asked why some popular places consistently seemed to underprice their goods. For example, ...
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  • 6,409
16 votes

Should I stay or should I quit?

Check out sunk cost. Although this might seem completely counterintuitive, the investment you have made should be irrelevant to your decision to stay or quit, if this investment has already been made ...
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  • 1,047
14 votes

How much do second-hand good purchases affect first-hand demand?

Coase (1972) has a classic treatments of this issue for monopolists selling durable goods. The general idea is that if Alice sells a textbook to Bob, Bob can resell it to Charlie when he is done with ...
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12 votes
Accepted

Should I stay or should I quit?

A relevant literature seems to be that on optimal stopping problems. There is a fairly technical Wikipedia article here and here's a book chapter. In economics, such models have been used to think ...
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  • 16.6k
11 votes
Accepted

How does Black Friday work?

Though the Black Friday savings do exist, they are less significant than in some of the early years when the "Black Friday" sales were just starting to get really popular. Raising prices is one way ...
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  • 226
10 votes

How does Black Friday work?

Black Friday is a marketing event that benefits from network effect . The more stores offer products for lower price and the more consumers know about them, the greater is the network effect. ...
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10 votes
Accepted

What is the difference between risk, uncertainty and ambiguity

Here is a decision-theoretic formalization of your definitions. The usual framework to talk about objective risk is the situation where a decision-maker expresses preferences over objective lotteries....
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  • 3,202
9 votes
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What is the point of silent auctions?

But perhaps this is not always the case. The price might have been so high that you would not have been willing to bid above it. In fact it might have been so high that the no one but the highest ...
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  • 26.2k
9 votes
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Why has increased productivity over the last 100 years not affected how much people work?

Let's work such a very simple model. We have a Robinson Crusoe island economy, an isolated individual that lives totally alone. In order to consume something Crusoe must work. Assume for even more ...
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9 votes

The beta delta model

The $\beta$-$\delta$ model, otherwise known as the quasi-hyperbolic discounting model, is introduced as an alternative to the traditional exponential discounting which suffers from the problem of ...
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  • 14.4k
9 votes

What is the main reason behind the study of Neo-classical economics, instead of behavioural economics?

Behavioral economics is in large parts a collection of models and theories that purport to explain deviations from the predictions of neo-classical theory. For this reason, textbooks in behavioral ...
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  • 4,557
8 votes

How does Black Friday work?

In a sense, I think the right question is not "why do firms offer a discount" (or, as you put it, why do smart firms not "react by increasing all of their prices in response to demand?") Rather, the ...
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  • 16.6k
7 votes
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Examples of behavioural breakdowns in game theory?

Here is an article that reports about several laboratory experiments showing large inconsistencies between theoretical predictions and observed behavior for some payoff structures: Goeree, J.K. and ...
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  • 86
6 votes

Examples of behavioural breakdowns in game theory?

This question is discussed in detail in the paper: Weibull, Jörgen W. "Testing game theory." Advances in Understanding Strategic Behaviour. Palgrave Macmillan, London, 2004. 85-104. Weibull ...
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6 votes

Should I stay or should I quit?

This handbook provides a broad overview of different modelling approaches to choice theory. Here, I give just one example: discrete choice modelling. Section 2 of this paper offers an example of a ...
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  • 8,437
6 votes

What do game theorists think of behavioural economics?

Disclaimer: My academic coming of age was in an environment where behavioral economics played only a minor role. My research is theoretical, both "behavioral and non-behavioral", economics. ...
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  • 5,090
6 votes

What do game theorists think of behavioural economics?

There are a lot of game theorists quite open to many versions of behavioral economics. That being said, I think there are some reasons why these are still fairly separate areas. I will focus in ...
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6 votes
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Do a group of economic agents really act as if they are rational?

The literature is full of examples in which either individual rationality leads to aggregate rationality individual rationality does not yield aggregate rationality (when public goods or ...
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  • 2,552
5 votes
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What does economics say about “starting from” pricing?

Glenn Ellison's "A model of Add-On Pricing" seems closely related to this issue. He addressed the question 'why don't firms compete more aggressively to attract consumers by lowering the initial ...
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  • 16.6k
5 votes

Tokens vs money

A two reasons additional to Steven's: Tokens can be individualized and smoothen the payment process. You can get a token exactly worth a ride, and the queues at the rides are shorter because nobody ...
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  • 10.4k
5 votes

Tokens vs money

Disneyland takes in about \$8 billion a year --- not all of it through tokens, but let's say they sell, oh, \$4 billion a year worth of tokens. People often buy tokens several hours before they use ...
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5 votes
Accepted

What are the recent advancements in building a unified theory of bounded rationality?

The term bounded rationality was introduced by Herbert Simon. He wrote "The term, bounded rationality, is used to designate rational choice that takes into account the cognitive limitations of ...
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5 votes
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Need help identifying this cognitive bias or fallacy pointed out by Kahneman in Thinking Fast and Slow

When this event occurs it is known as a failure of "transitivity" of preferences. Transitive preferences are such that for every X,Y,Z, if X is preferred to Y and Y is preferred to Z then X must be ...
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5 votes

What is the difference between risk, uncertainty and ambiguity

So far you have got no answer to your last question, about Knight and others' view on risk and uncertainty. In fact, there is quite a radical distinction between the view of uncertainty in Knight (and ...
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  • 8,437
5 votes

Was the Concorde project an example of the sunk-cost fallacy?

I doubt that the sunk-cost fallacy was a major reason why the Concorde project was pursued for so long (approved by the UK government 1962, entered commercial service 1976). Any "emotional impact on ...
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  • 6,813
5 votes
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Name of example of irrationality of proportional and absolute cost

I think you're referring to the jacket-calculator problem, first proposed by Tversky and Kahneman (1981) as their Problem 10. The paper illustrates the idea of mental accounting with several problems ...
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5 votes
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What is a good handbook for behavioral economics?

Sanjit Dhami's The Foundations of Behavioral Economic Analysis is arguably the most comprehensive review of the work in behavioral economics to date.
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  • 14.4k
5 votes

Additional components in utility functions (behavioral economics)

Your formulas contain an undefined $p^*$, and the Fehr-Schmidt utility function is wrong. The brackets should be $\max\{p^*-p,0\}$ and $\max\{p-p^*,0\}$, respectively. Apart form that, the two ...
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  • 4,557
5 votes

Additional components in utility functions (behavioral economics)

Thaler's acquisition/transaction utility and Fehr-Schmidt's inequity averse utility apply in very different contexts, and the arguments to the two utility functions are different as well. Thaler's ...
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  • 14.4k
5 votes
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Is there any example for "pluralistic ignorance" in economics?

Pluralistic ignorance is a theory explaining why social practices continue to be perpetuated when almost no individual seems to support them. When pluralistic ignorance is at play, agents act in the ...
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