18

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, concerts often sell out very quickly and fancy restaurants in the middle of a busy suburb might be often crowded. These venues could raise their prices, but the basic ...


16

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 and cannot be recovered. What matters is whether the benefits you are yet to incur outweigh the costs (that you are yet to incur). So the decision should be a ...


12

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 about how sellers learn about selling opportunities, investment in R&D, and optimal labor search strategies.


10

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 that merchants could try to respond, but then they might exclude the deal-seekers whom they are targeting. Instead, merchants have been doing other things. ...


10

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. Normally when you put your product on sale at reduced price, you have several problems to deal with. Your target consumers need to be informed of your offer and they ...


10

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. Formally, if $X$ is a prize space, objective lotteries are defined as elements of the space $\Delta(X)$ of probability distributions (usually with finite ...


9

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 bidder would have given that bid. Knowing this the highest bidder could decrease his bid. In fact in English auctions (non-silent rising bid auctions) the final ...


8

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 simplicity that capital is not needed (say, fruit-gathering by hand). Crusoe does not like to work but he would rather sit relaxed and enjoy the good weather in ...


6

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 interesting question is why do firms ever not discount their prices? After all, if consumers can shop around for a good deal then one would expect that all but ...


6

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 Holt, C.A., 2001. Ten little treasures of game theory and ten intuitive contradictions. American Economic Review, 91, 1402-1422. https://doi.org/10.1257/aer.91....


6

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 dynamic discrete choice model about educational choices. The decision tree is: Individuals compare the return of each option, based on their ability and other ...


5

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 price?' The answer that he offers is that doing so induces an adverse selection problem because lowering the advertised price will disproportionately attract "...


5

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 needs to get change for a 10\$ bill. You forget the value of tokens easier. Everytime you pay cash, you see in front of your eyes how much poorer you are getting....


5

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 them, so Disneyland gets to hold \$4 billion a year for, oh, say, four hours longer than they would without tokens. At 6\% annual interest, that's worth about \$...


5

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 both knowledge and cognitive capacity. Bounded rationality is a central theme in behavioral economics. It is concerned with the ways in which the actual ...


5

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 Keynes) and that presented in Oliv's answer. In brief, according to Knight (1921) risk refers to situations where the classification of states, events or ...


5

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 discusses the issues with not knowing the actual payoff functions, the players not knowing the actual payoff functions (incomplete information), and situations ...


5

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 British citizens" that it was feared cancellation would cause would more likely have been due to a loss of national prestige (this was a time when many in ...


5

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 additional terms are usually called the disutility from advantageous inequity and the disutility from disadvantageous inequity, respectively. Calling them "...


4

One recent paper that is being positioned as a very wide-ranging theory of bounded rationality (although certainly it doesn't come close to capturing every insight in the field) is Gabaix's forthcoming QJE, A Sparsity-Based Model of Bounded Rationality. Gabaix formulates a fairly general model where agents can rationally decide to pay limited attention to ...


4

Top 10% authors in the field of Cognitive & Behavioural Economics https://ideas.repec.org/top/top.cbe.html Ernst Fehr, Institut für Volkswirtschaftslehre, Wirtschaftswissenschaftliche Fakutät, Universität Zürich, Zürich, Switzerland Urs Fischbacher, Fachbereich Wirtschaftswissenschaften, Universität Konstanz, Konstanz, Germany Robert Sugden, School of ...


4

It is standard approach by now to acknowledge the existence of a "rate of pure time preference", denoted usually by $\rho$, that characterizes individuals. This is a fundamental aspect of preferences - a "primitive" parameter. It is not a proxy for the existence of uncertainty (this is why it is found also in deterministic models), neither does it reflect "...


4

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 preferred to Z. Economists define rational preferences as binary relations that are complete and transitive, meaning that we can compare everything and the ...


4

If free speech is narrowly defined to only include true claims, true and false claims can be perfectly distinguished, the harm of false claims perfectly measured, and all claims are either true or false, then false claims are really no different than other forms of pollution. A standard pigovian tax should internalize the externalities and encourage the ...


4

Yes, a whole book has been written on Behavioral Game Theory. More specifically, standard solution concept such as Nash equilibrium requires that players best respond to a correct belief about other players' moves. The following are examples that relax one of these cognitive restrictions: Quantal response equilibrium allows for the possibility that ...


4

Perhaps there is some evidence toward your claim, but I would argue that in most situations, people do not use point estimates (although some "smoothing" likely occurs). In particular, there is no doubt that people care about the second movement (variance). The commonly employed, and robustly empirically documented, notion of risk aversion captures exactly ...


4

The $\beta$-$\delta$ model, otherwise known as the quasi-hyperbolic discounting model, is introduced as an alternative to the traditional exponential discounting which suffers the problem of being inconsistent with empirical evidence. Exponential Discounting Traditionally, economists use exponential discounting to capture the fact that things in the ...


4

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 regarding uncertainty, and problem 10 illustrates "the temporary devaluation of money": The following problem, based on examples by Savage and Thaler, ...


4

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


4

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 acquisition/transaction utility function is used to evaluate purchasing decisions. Say an individual has value $\bar p$ for an object that sells for $p$, and the ...


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