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Data News: Free eBooks on Introductory R and Big Data Analytics, and More

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Some writings worth reading, here and there

A good rule of thumb, though not always true, is this: Modern (“neoclassical”) economic theory has been pretty successful at describing people’s decision-making patterns in static settings, but not so good at describing how people make decisions in dynamic settings. When people have to peer into the future to make their decisions, they do stuff that we don’t really understand yet. The key way that economists model behavior is by assuming that people have preferences about things. Often, but not always, these preferences are expressed in the form of a utility function. But there are some things that could happen that could seriously mess with this model. Most frightening are “framing effects”. This is when what you want depends on how it’s presented to you. For example, suppose I asked you to choose between Skippy and Peter Pan peanut butter, and you chose Skippy. But suppose I instead asked you to choose between Skippy, Peter Pan, and Jif, and you chose Peter Pan! This is really weird, since the first choice would imply that you preferred Skippy over Peter Pan, and the second choice would imply that you preferred Peter Pan over Skippy. The only thing that changed was the fact that there was Jif sitting nearby. If this kind of thing happens often, then modeling human preferences is probably hopeless, because there’s no way we can predict all the little factors that could affect a given decision. In other words, with framing effects, preferences will tend to be unstable.” [to be continued...]


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