Behavioral economics

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

Explain what a cognitive bias is and why we are "born with" them. Describe a bias you have experienced in a real or imagined purchase (a sale, a fashion trend, a repeated opinion) and how it changed your decision.

A store displays a jacket with the sign "was $\$120$, now $\$79$", even though it was never actually sold for $\$120$. Identify which psychological bias this sign exploits and explain how it works.

At a street market you ask the price of a lamp and the seller says "fifty, but for you thirty". Explain what the anchoring effect is and how the seller is using it: why does $\$30$ seem cheap to you even though the lamp is worth $\$20$?

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?

One yogurt is advertised as "$90\ \%$ fat-free"; another, identical, would say "contains $10\ \%$ fat". Most people perceive the first as healthier.

1. a) What does this example show about how the frame (framing) in which the same information is presented matters?
2. b) Give an example of framing in economic news ("unemployment falls" versus "employment rises only slightly") and explain what effect it has on the reader's mood.

An online store offers "free shipping on orders over $\$30$". You wanted a $\$22$ product and shipping costs $\$4$; to avoid it you add something else for $\$9$ that you did not need to your cart.

1. a) How much extra have you spent to "save" the shipping fee? Do the calculation.
2. b) What biases has the store used? Explain how the "free" hook and the aversion to paying for shipping work together.

'Losing $\$10$ 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.

In an experiment, one group is given a mug and then asked for how much they would sell it; another group is asked how much they would pay for the same mug. Sellers ask, on average, twice as much as buyers offer.

1. a) Which behavioral economics bias does the result show? Name it and define it in your own words.

1. b) Which prediction of the classical rational model does this result contradict? Explain the contradiction.

Many people prefer $\$10$ today over $\$12$ in a week, but prefer $\$12$ in $53$ weeks over $\$10$ in $52$ weeks, even though the extra wait is the same: one week.

1. a) Explain what inconsistency those two choices show (we prefer immediacy to an exaggerated degree).
2. b) Relate this bias to how hard it is to save or study in advance, and mention one trick to overcome it (prior commitments, automating saving).

Liam 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.

Liam 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 Liam 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 Liam'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 telecommunications company offers two annual cell phone plans:

• Basic Plan: $\$18$ per month for $25\ \text{GB}$. If the monthly allowance is exhausted, each additional gigabyte costs $\$4$.

• Unlimited Plan: $\$40$ per month with unlimited data without restrictions.

A customer analyzes her actual usage over the past $12$ months: for $10$ months she consumed an average of $18\ \text{GB}$ per month, and only in $2$ months (summer vacation) did she reach $28\ \text{GB}$ per month. Despite these objective data, she decides to sign up for the Unlimited Plan, stating: "I don't want bill surprises; I'd rather pay a higher fixed fee to have total peace of mind that I'll never be charged an extra fee".

1. a) Interpret the customer's usage data and calculate the total annual cost she would have paid with the Basic Plan compared to the Unlimited Plan. Exactly how much is the annual premium she pays for that "peace of mind"?
2. b) Justify economically why the customer's choice contradicts the classical model of the rational consumer (homo oeconomicus), analyzing the cognitive biases that explain her decision (such as loss aversion and the overweighting of rare events).
3. c) Predict how contracting decisions would change if the telecom company were required by law to send a real-time alert upon reaching $80\,\%$ of the allowance and to allow the one-click purchase of extra $5\ \text{GB}$ packs for $\$5$.

Mateo has a monthly budget of $\$150$ for personal expenses and aims to save $\$50$ each month to buy a computer in a year. However, halfway through the month he usually runs out of funds due to impulse purchases at online stores (flash deals with countdown timers and personalized recommendations with limited-time discounts). At the end of the month he gets frustrated and says: "The problem is that I lack willpower; from now on I will try harder and won't buy anything superfluous".

1. a) Explain why Mateo's strategy of "relying on his willpower" is doomed to fail, using the concepts of present bias (hyperbolic discounting) and the time inconsistency of economic decisions.
2. b) Design a personal choice architecture plan and commitment devices for Mateo that operate both when receiving his income and at the moment of purchase, eliminating the need to rely on willpower in the heat of the moment.
3. c) Justify whether e-commerce companies that create offers with scarcity timers are engaging in fair informational competition or exploiting a cognitive vulnerability of consumers by distorting their valuation of opportunity cost.

You have been with the same cell phone company for three years even though there are better deals, because switching "feels like too much hassle". Explain what the status quo bias (or default option bias) is and how companies take advantage of it with automatic renewals and red tape for canceling.

Two almost identical restaurants, one full and one empty: most people choose the full one. Explain what social proof is (we do what others do) and reason about when it is a reasonable shortcut and when it can lead us astray.

A music app offers three free months and, after that, automatically charges $\$9.99$ 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.

"Biases are not foolish: they were useful once." Discuss this statement: reason in what contexts following the majority (social proof) or fleeing from losses could have been a good strategy, and explain why those same shortcuts fail in a supermarket, a social network or an investment app.

In the school cafeteria, 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.

An online store shows "only $2$ left in stock!" and a fifteen-minute countdown to buy. Explain what emotions those messages trigger (fear of missing the opportunity, urgency) and why they push people to buy without comparing.

The supermarket places the more expensive name-brand products at eye level, the store-brand products on the lower shelves, and the candy next to the register.

1. a) Identify which "choice architecture" techniques it uses and what biases they exploit.
2. b) Propose three specific habits for shopping rationally despite those techniques.

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

1. a) Explain which bias automatic enrollment 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.

A food delivery app includes a $15$-minute countdown timer on its checkout screen with the message: "Only $2$ couriers left in your area! Add a dessert for $\$3.20$ (regular price: $\$4.80$) before your booking expires". Additionally, a $10\,\%$ courier tip and a $\$0.50$ charity round-up are pre-selected by default.

1. a) Identify the cognitive biases or heuristics exploited by each of these elements (timer, courier notice, strikethrough price, and pre-selected boxes) and explain how they alter the user's perception of opportunity cost.
2. b) A platform spokesperson argues: "We don't force anyone; consumers are free to uncheck the boxes or reject offers if they don't maximize their utility". Refute this claim using bounded rationality theory and the concept of dark patterns in choice architecture.
3. c) Design a proposed interface modification that preserves useful information for the consumer while ensuring that the additional spending decision results from active deliberation rather than behavioral manipulation.

A state government wants to increase recycling without banning anything.

1. a) Design a "nudge" intervention: which option would you set as the default, how would you arrange the bins or what information would you give, and explain what bias each detail exploits.
2. b) Define the ethical limits of the measure: what separates it from manipulation? Mention freedom of choice and transparency.

A telemarketing company offers elderly clients a hybrid financial product (a life insurance policy linked to an equity investment fund). During the call, the agent highlights a "historical return of $5\,\%$," warns that "there are only $3$ discounted policies assigned to your ZIP code left for today," and omits mentioning in an understandable way an annual management fee of $2\,\%$ and a $10\,\%$ penalty for surrenders made before $4$ years.

1. a) Analyze the biases and mental shortcuts (scarcity heuristic, anchoring, cognitive overload, and loss aversion) intentionally exploited by the telemarketer to accelerate the client's consent.
2. b) The company defends itself before the regulatory agency by arguing: "Clients are free adults, and the recording confirms that they gave their consent after the legal clauses were read to them; prohibiting these sales would violate the principle of party autonomy." Refute their argument using the economic concepts of information asymmetry, bounded rationality, and malicious frictions (sludge).
3. c) Design two public regulation measures (one based on choice architecture and another of a regulatory nature) to protect consumers in telephone sales of complex products, and evaluate a possible unintended side effect that your regulation could cause in the insurance market.