Week 1 - (Tversky and Thaler, 1990)
1. What is a preference reversal and why does it constitute an anomaly?
2. Explain how preference reversal could arise due to (a) intransitivity of
preferences, and/or (b) failure of procedural invariance (don’t worry about the
third explanation in the paper, and related discussion, as we have not yet
studied expected utility theory).
3. What is the evidence regarding the likely explanation for this anomaly?
4. What are the implications for consumer decision-making?
A situation where preferences for two bundles changes after the information is
conveyed in a different manner, constitutes an anomaly because it is a phenomenon
that is hard to rationalise.
When a good is priced higher than another by consumers, they would pick a different
one over the other. Procedural invariance is when you try to measure a result using
two different methods and gain different results from each procedure.
Can arise from violation of transitivity, procedure invariance or the independence
axiom.
Mainly failure of procedural invariance, overpricing of L
Consumers do not have pre-established preferences or complete information
Week 2 - (Dar-Nimrod et al, 2009)
People tend to be attracted to more choice, but are less satisfied with the outcome
Maxmisers experience this paradox
Satisficers do not
Week 3 - (Jensen and Miller, 2008)
Giffen behaviour can occur in developing countries where consumers have nutritional
concerns
Can be seen where consumers eat a staple calorie rich cheap good with no substitutes and
a fancier good which tastes nice
They require a certain amount of the staple good to meet their dietary needs and then
beyond that they consume a fancy good with any money they have left over
Therefore with a price rise of the staple good, they consume more to meet their calorie
needs
Randomly selected poor households in two chinese provinces and offered them price
subsidies for staple foods
Subsidies causes rice consumption to decrease
Policies to increase nutrition among poor consumers may have the opposite effect
Week 4 - (Blundell et al., 2020) Could coronavirus infect the Consumer Price Index?
The basket of items used to calculate CPI is no longer representative, for example meals
out, package holidays are in CPI basket and yet none were available in pandemic
The CPI for 2021 and 2022 would normally be based on spending taking place in 2020,
which is unlikely to be representative, so problems interpreting CPI will extend beyond 2020
Some costs may not have increased - people may have to shop in different places for
branded items
The gap between what CPI is actually measuring - prices - and what it is thought to be
measuring - maintaining a standard of living , will be much bigger than usual
(Cavallo, 2020) Inflation with Covid consumption baskets
When measuring inflation using a more representative spending basket during Covid, it was
found prices are rising faster than CPI, so CPI is understating inflation
May 2020 US - 0.95% vs 0.13%
Policy implications when trying to respond to Crisis
Week 5 - (Manning , 2015) The top rate of income tax
If a new government were to raise the top rate of income tax, it is unlikely
that the UK’s highest earners will work less hard but it is likely they will try
harder to avoid paying tax. That means tougher enforcement will be needed
if taxes rise, says Alan Manning.
Effort responds to changes in tax, not necessarily hours worked, real wages
may fall
This could be due to (i) changes in labour supply, such as hours worked or effort in work, or
(ii) more effort in tax avoidance schemes or even tax evasion! In the UK, the evidence is that
hours worked are not very responsive at the upper end of the income distribution and effort
does not seem to vary much across the income distribution (though seems to rise over time).
On the other hand, there is evidence of tax evasion or avoidance. Our model focuses on the
labour supply response – itis more helpful/relevant when trying to understand behavioural
responses at the lower end of the income distribution. Especially for workers who have some
control over their hours.
Week 7 - (Kahneman & Thaler, 2006)
Experienced utility differs from decision utility
Arises due to bounded rationality, imperfect information and the influence of short term
emotions
What is a ‘hedonic forecast’? Under what circumstances are such forecasts likely to
be flawed? (see Introduction)
Forecasts of future utility, being in an abnormal emotional state, for example being
hungry when doing weekly food shopping may lead to overconsumption
What is ‘projection bias’? Provide an example you find compelling (need not be from
the article). What does projection bias imply for utility maximization? (see Effects of
the Current Emotional State).
When consumers are making decisions, they project their current mental and
emotional state onto their future one, for example the hungry shopper is predicting
their short term hunger impulse onto their future self for the rest of the week when
doing their weekly shop and thus overconsumes. Implies consumers don’t always
maximise utility as they have changing preferences
What does it mean when products are said to be ‘jointly evaluated’? Provide an
example you find compelling (need not be from the article). How might this lead to
flawed forecasting of experience utility? (see Effects of the Context of Choice)
A good may be evaluated differently when comparing it side by side with another
good(joint evaluation) or when you evaluate it on its own(separate evaluation), it can
lead to preference reversals
Give an example of how human memory of a past experience can be biased? Why
does this matter? (see Learning from the Past)
Human memory of decision utility can be biassed by the current emotional state of
the individual at the time, also duration of experience neglected, average of
emotional state seems to be taken
What is ‘focusing illusion’? Provide an example of this you find compelling (need not
be from the article). How might this lead to flawed forecasting of experience utility?
(see Mispredicting Adaptation).
Tendency to over exaggerate an aspect of your life when you focus or think about it
Week 11 - Big Data and Differential pricing, 2015
Extraction of consumer surplus, goods can be priced closer to the max of what you will pay
due to big data lowering costs of data collection. Consumers benefit when they are shown
search results of goods they will be more likely to buy, producer surplus gain. Close to first
degree price discrimination
Exploring demand curve through randomised pricing to know optimal price to set
Showing different products to different groups based on demographic
Slow uptake of privacy tools
Policy-
Anti discrimination laws, disadvantaged groups are more price sensitive due to lower
incomes
