Behavioral Economics

Explain what behavioural economics studies and how its view of people differs from that of the rational decision-maker model.

A shop displays a jacket with the sign "was $\$2\,400$, now $\$1\,580$", even though it was never actually sold for $\$2\,400$. Identify which psychological bias this sign exploits and explain how it works.

The figure shows the result of a classroom experiment: group $1$ was first shown a backpack marked 'was $\$60$' and group $2$ the same backpack marked 'was $\$30$'; then everyone was asked to say how much they would pay for it.

1. a) Interpret the results: what effect is observed and what is it called?
2. b) What advice would you give a consumer to protect themselves from this effect?

'Losing $\$200$ hurts more than finding them brings joy.' Explain which bias this phrase refers to and describe a situation in your everyday life where this bias changes a decision.

Carlos joins a gym in January and must choose between two subscription options:

• Option A (Fixed annual fee): $\$360$ in a single non-refundable payment (equivalent to $\$30$ per month).

• Option B (Flexible pass): $\$5$ per individual session through reloadable passes with no minimum commitment.

Carlos plans to attend $3$ days a week (about $12$ times a month). However, aggregate statistics from the facility show that clients with his profile attend an average of $14$ times a month in January and February, but drop to just $2$ monthly visits from March to December. In addition, many admit that in the spring they go "reluctantly and feeling forced just to avoid throwing money away".

1. a) Calculate the cost per session that Carlos expects to pay based on his forecast under Option A, and compare it with the actual average cost per session he will end up paying if his actual attendance follows the statistical average over the $12$ months.
2. b) Explain how the overconfidence (or planning) bias and the sunk cost fallacy influence Carlos's behavior. Justify what decision a strictly rational consumer should make in March when evaluating whether or not to attend a specific session, distinguishing between sunk cost and opportunity cost.
3. c) A report concludes: "Gyms base their profitability on exploiting the predictable irrationality of their members". Justify why the company prefers to market Option A and predict what would happen to its revenue and capacity limits if the law required it to refund the proportional part of the fee in months without attendance.

A music app offers three free months and, after that, automatically charges $\$199.80$ a month unless the user cancels.

1. a) Which biases does this strategy take advantage of? Name at least two and explain how they work.
2. b) Do you think it is ethical? Justify your answer.

In the school canteen, fruit is placed at eye level and sweets are placed in a secluded corner, without banning anything. Explain what a 'nudge' is and why this measure is an example of one.

A food delivery app uses bright colors, countdowns ('$2$ delivery drivers left in your area') and featured ratings so that you order faster and in larger quantities.

1. a) Identify two of these techniques and the bias that each one exploits.
2. b) Discuss where the line is between persuasion and manipulation, and who should monitor it.

The Government wants more young people to save for retirement. One proposal is to automatically enrol them in a savings plan when they start work, with total freedom to opt out whenever they want.

1. a) Explain which bias automatic enrolment takes advantage of and why it is more effective than an information campaign.
2. b) Assess whether it is a legitimate paternalistic measure or an intrusion, defending your position.