# Behavioral Economics - PDF Document

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1. Behavioral Economics Mark Dean Homework 4 Due Tuesday 28th February PLEASE DO QUESTION 1, 2 AND 3 ON SEPARATE SHEETS OF PAPER Question 1 Consider choices between 4 alternatives X = {x,y,z,w}. Imagine a decision maker that makes choices using the satisficing procedure: they have a fixed utility function over X (to make things easy assume no ties), and search through their choice set in some order. If they find something above their reservation utility they stop and choose that object. If not they search the whole set and choose the best option. The order in which the DM searches through the available options in a particular choice set is random, with each ordering equally likely. As the experimenter, we observe the same DM making lots of choices. So for each choice set A ⊂ {x,y,z,w}, and a in A, we observe p(a,A), or the probability of choosing a from choice set A. Call this a stochastic choice data set. So, for example if the DM chooses x from {x,y,z} in1 3of trials, then P(x,{x,y,z}) =1 3. 1. Imagine that all the alternatives are below the reservation utility. What are all the possible values that p(a,A) could take (i.e. is it possible that we could see the DM choose a with probability 1 for some a ∈ {x,y,z,w} in some choice set A? With probability 0? with probability1 2?) 2. Imagine that only one object is above the reservation level. What is the answer to the above question? 3. Now what about if there are two objects above the reservation level? 4. Use your answer above to come up with a behavioral rule to identify the objects above reservation utility and those below (i.e. write and prove a statement of the form "if 1