Behavioral Economics

2.

Core Theoretical Frameworks

2.1.

Prospect Theory

2.1.1.

Critique of Expected Utility Theory

2.1.1.1.

Empirical Violations

2.1.1.2.

Descriptive vs. Normative Models

2.1.1.3.

Allais Paradox and Other Anomalies

2.1.2.

The Editing Phase

2.1.2.1.

Coding of Outcomes

2.1.2.2.

Combination of Probabilities

2.1.2.3.

Segregation of Riskless Components

2.1.2.4.

Cancellation of Common Components

2.1.2.5.

Simplification Processes

2.1.3.

The Evaluation Phase

2.1.3.1.

The Value Function

2.1.3.1.1.

Reference Dependence

2.1.3.1.2.

2.1.3.1.3.

Diminishing Sensitivity

2.1.3.1.4.

Concavity for Gains

2.1.3.1.5.

Convexity for Losses

2.1.3.2.

The Probability Weighting Function

2.1.3.2.1.

Overweighting of Small Probabilities

2.1.3.2.2.

Underweighting of Moderate and High Probabilities

2.1.3.2.3.

Inverse S-Shape

2.1.4.

The Fourfold Pattern of Risk Attitudes

2.1.4.1.

Risk Seeking for Low-Probability Gains

2.1.4.2.

Risk Aversion for High-Probability Gains

2.1.4.3.

Risk Aversion for Low-Probability Losses

2.1.4.4.

Risk Seeking for High-Probability Losses

2.1.5.

Applications and Extensions

2.1.5.1.

Cumulative Prospect Theory

2.1.5.2.

Rank-Dependent Utility

2.2.

Dual-Process Theory

2.2.1.

System 1: Intuitive and Automatic Thinking

2.2.1.1.

Characteristics of System 1

2.2.1.2.

Fast and Effortless Processing

2.2.1.3.

Emotional and Associative

2.2.1.4.

Strengths and Weaknesses

2.2.2.

System 2: Reflective and Deliberate Thinking

2.2.2.1.

Characteristics of System 2

2.2.2.2.

Slow and Effortful Processing

2.2.2.3.

Logical and Statistical

2.2.2.4.

Cognitive Effort and Resource Limitations

2.2.3.

Interaction and Conflict Between Systems

2.2.3.1.

Switching Between Systems

2.2.3.2.

Cognitive Load and Decision Quality

2.2.3.3.

Override Mechanisms

2.2.3.4.

Default Processing Modes

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1. Foundations of Behavioral Economics

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3. Heuristics and Biases