Behavioural Economics — DU B.A. (Hons.) Economics Previous Year Question Papers

1. (a) Explain the various forms of overconfidence with the help of examples. (b) Discuss extrapolative beliefs and law of small numbers. (9) 2. It is IPL season and you have your assignment due. You have a three-day weekend coming up in which you should finish this assignment. Friday's match is not so exciting, Saturday's is better and your favourite team is playing on Sunday. The cost of delaying writing the paper is increasing, where c = (13,21,34). Assume the quality of your assignment is unaffected by when you do it and thus the reward in every period is constant at v. For both sophisticates and naif β = ½ Find the strategy and individual welfare for time consistents, sophisticates and naifs. What commitment strategy can sophisticates use to behave like time consistents? (18) 3. (a) What is the endowment effect? Discuss a lab experiment that documents this phenomenon. (9) (b) Suppose that Karishma is a standard decision maker and would always reject a lottery in which she is equally likely to win `10 or lose `9. Given these preferences, do you think she would accept a lottery in which she has equal chances of losing `180 or winning `1,000? What if instead of winning 1,000, the prize were `10,000 or any amount of money? Suppose the typical loss aversion coefficient is 2. (9) 4. (a) (b) You have a choice between the following lotteries : Most people prefer B to A and C to D. Analyse this behaviour using expected utility and prospect theory. (9) Why does the Allais Paradox occur and how can it be resolved? (9) 5. (a) (b) With the help of evidence from laboratory experiments, discuss how different forms of generosity cannot be adequately explained with self-interested preferences. (9) What is altruism? How can we extend the standard model to incorporate altruism? (9) 6. (a) Explain mental accounting and sunk-cost effect. (9) (b) How can we incorporate inattention? Discuss the evidence of inattention in the context of auction prices and financial investments. (9) (loss aversion coefficient) 2 ₴l (6) ÷¡ be fee i see a (self-interested preferences + e (9) a mental conting ine ser ef a see (sunk-cost effect) ait