Deck 6: Thinking Like a Modern Economist

Question 1

Give an example of predictably irrational behavior.

Answer 1

Student answers may vary.Examples can be found in the text,especially from the subsection entitled "Are You Predictably Irrational?"

Question 2

If behavioral economists do not believe that people are rational,what do they believe? Do behavioral economists believe that people are irrational?

Answer 2

Behavioral economists believe that people exhibit purposeful behavior,which means that they make decisions as well as they can in pursuit of a goal.They do not believe that people are strictly irrational,although they allow for situations where people are not completely rational and calculating but are "predictably irrational."

Question 3

How do the traditional building blocks differ from the behavioral building blocks? What similarities do they have? What are the advantages and disadvantages of each set of building blocks?

Answer 3

The traditional building blocks are the assumptions of rationality and self-interest.The behavioral building blocks are the assumptions of purposeful behavior and enlightened self-interest.They are similar in the sense that they both assume that people choose their behaviors in pursuit of a goal.The behavioral building blocks are less strict in the way they describe how people choose their behavior,and they allow for a broader set of goals.The advantages of the traditional building blocks are that they are easier to use,leading to models that are solvable; the disadvantage of the traditional building blocks is that many argue they do not accurately describe human behavior.Behavioral building blocks are just the opposite: they are not easy to use,and they lead to very complicated models that can not always be solved; many believe,however,that they more accurately reflect the way that individuals behave.

Question 4

What is a regression model? How do you interpret the worth of a regression model?

Question 5

What is econometrics?

Question 6

Do the assumptions of a model have to accurately describe behavior for the model to be useful? Explain.

Question 7

What is the endowment effect? How do behavioral economists explain the existence of this phenomenon?

Question 8

Suppose a person buys only fruits and vegetables while at the grocery store,even though he or she hates fruits and vegetables and would much rather eat junk food.Much of the produce goes bad before it is consumed and must be thrown out.What name is given to this kind of behavior? Is it rational?

Question 9

What is a game theory model? Give two examples of decisions by households or businesses that you think might be appropriately analyzed using game theory models.Give two examples of decisions by households or businesses for which the use of a game theory model might not be necessary.What is the harm of using a game theory model where it is not necessary?

Question 10

What are heuristic models? Do they help us understand the world around us? What are their limits?

Question 11

Have all modern economists given up the use of the traditional building blocks? Why or why not?

Question 12

What is the difference between the purposes of a scientific model and an engineering model?

Question 13

What are the three most common structures that economic models have?

Question 14

What is an empirical model? What is its usefulness?

Question 15

Are modern economists unified in their prescriptions for government policy? Do behavioral economists and traditional economists generally agree or disagree on government policy?

Question 16

In your text,the author says,"Data,by themselves,have no meaning; they have to be interpreted and given meaning,and how one interprets the data depends on the model and the building blocks one has in one's mind." What does he mean by this? What does this say about the relationship between empirical and formal models?

Question 17

What are the limits of heuristic models?

Question 18

What does your author mean when he says that the human mind is a fast pattern completer?

Question 19

Give an example of two different sets of assumptions that could underlie different economic models.

Question 20

Is following a rule-of-thumb rational? Can it ever be rational to be irrational?

Question 21

Give four examples of complicated modern formal models that are usable due to advances in mathematics and computing,and give a brief description of each.

Question 22

How do traditional and behavioral economists differ in their opinions about whether the government should have done something to stop the housing bubble in the early 2000s?

Question 23

What is a natural experiment? Why do economists rely on natural experiments?

Question 24

How do traditional and behavioral economists differ in their opinions about whether households are saving enough?

Question 25

Do economic models lead directly to theorems or to precepts? Why or why not?

Question 26

Suppose you were suspicious that shorter people lived longer lives,how would you go about testing this hypothesis? What kind of model would you need to use? How would you determine whether height was related to longevity? What are the potential shortcomings of your analysis?

Question 27

What does your author mean when he says that there is a tradeoff between simplicity and completeness?

Question 28

How do traditional and behavioral economists differ in their opinions about economic growth?

Question 29

What are two different kinds of equilibria that would have been difficult for early economists to analyze but are possible to analyze today because of advances in mathematics and computing?

Question 30

How does the empirical testing of formal models "reverse" the process of heuristic empirical modeling?