Behavioral Economics Lesson One: Introduction to Behavioral Economics
Students will be able to:
- Understand the differences in assumptions about behavior from the standpoint of tradition economics and behavioral economics.
- Analyze situations in which behavioral economics more accurately explains individual behavior.
In this economics lesson, students learn about behavioral economics to understand individual behavior.
Have the students answer the following questions in a complete sentence:
1. In economics, making a rational decision is not the same thing as making a decision that everybody else would say is smart. Do you think that you are a rational person? How?
2. In economics, being rational means that we choose the thing we like the best, and in economics, we don’t try to understand why someone makes the choices they do. We just assume that people weigh the costs and benefits and make a choice. What do you think about this economics assumption?
3. Have you ever made an irrational decision? Write one example about the time you made an irrational decision.
Write the following on the board:
Focusing attention on an obvious thing, or the first piece of information, is a common thing, but it is something that traditional economics does not pay attention to. Behavioral economics, like traditional economics, examines how people make decisions. Behavioral economics tries to explain when and why people’s decisions are not easily explained by rational decision making. Display the following YouTube video on Selective Attention Test or have each student use their own device to view the video. Be sure not to say anything about the gorilla! After students watch the video, ask the students who saw the gorilla?
Lead the students through the PowerPoint Slides included in the lesson. Speaking notes are included to assist with the slides.
Divide the class into groups of five members each. Tell each group that two of the members of the group will administer three experiments to the remaining members of the group. Tell the administrators to get the Activity 1 experiments and the instructions for the experiments with the Activity 2 recording sheet. Have the administrators read the instructions. Clarify any questions without revealing the specific nature of the experiments to the subjects. Tell the administrators to give each subject the three experiments. Have the remaining subjects move to a corner of the room and turn their backs so they cannot see or easily overhear the experiments. (Alternatively, the subjects could leave the room, depending on the maturity of the class and the regulations of the school.) Give the students approximately 10 minutes to administer the experiments and record the results.
After the results are recorded, ask the groups to: Decide what the correct answers are (tell them you will let them know after they discuss). Examine the results from the experiments. Discuss amongst themselves what they believe the experiment is supposed to demonstrate. Tell the groups that after 10 minutes a representative should be ready to give the class a summary of their results of each experiment and give an opinion as to what they believe the experiment showed.
After 10 minutes, discuss each experiment by first asking each group representative to report the results for the experiment. Note that the information can be summarized on the board or just verbally summarized after each group has reported. Exact numbers are not required for the discussion below but some students may like to “keep score.” Have the representative report what they believe the experiments show.
After the results have been summarized, debrief each experiment using the following information:
Experiment #1: Most people will take more time and be more inaccurate with the second set of words. The reason is that the mind reads the word and wants to report the word, not the color of the word. Emphasize that the mind often quickly grabs the first piece of information and uses that information in forming responses to other questions.
Experiment #2: The experiment is a famous example of the “conjunction fallacy” in which people think an event with more specific parameters is more likely to occur than an event with more general parameters. The correct answer is A. To demonstrate this to the class, ask them to assume that there are 100 Lindas. Ask them to give an estimate of the number of Lindas that are bankers. (Any number less than 100 is fine.) Ask the students to give the number of Lindas that are bankers AND active in the women’s movement. (The students should give a number smaller than the number of bankers. If it is not, point out that the total number of bankers is less than the total number of women’s movement bankers.) Emphasize that human minds jump to conclusions by trying to link pieces of information together, often without logically thinking about the results. Since “women’s movement” and “banker” are strongly linked in the subject’s mind for Linda, the probability is inflated.
Experiment #3: The correct answer is 5 cents. However, a common answer is 10 cents. Tell the students that this is an example again of how minds tend to grab a piece of information to answer a question. Seeing $1.10 provides two numbers in the subject’s mind: 1 dollar and 10 cents. This leads the subject to inaccurately give 10 cents as the answer. Conclude the discussion on the experiments by letting the students know these are famous experiments and that they should not feel bad if they “fell” for some of the incorrect answers! Ask the students what these experiments as a whole demonstrate. (That our minds can make mistakes and often jump to conclusions that are incorrect.) Tell the students that behavioral economists and psychologists understand that our minds are influenced by two systems, sometimes called system one and system two.
Tell the students that you are considering giving each of them some extra credit. Hand out to each student a slip of paper with a number from 1 to 10 written on it. Explain to the students that you are considering giving each of them the points shown on their slip as extra credit. Ask them if they would like the extra credit. (Yes, although some may be disappointed at the fact that they only received 1 point.) Ask a few of the students to announce how much extra credit you are considering given them, continuing until the students get a sense that some received a lot more points than others. Ask the students if they are still happy with their potential extra credit. (Accept a wide range of answers, but ask students who suggest that this is not fair to elaborate on why they believe the distribution is unfair.) Tell the students that behavioral economists have shown that fairness and other principles matter to people. In this case, some who should have been happy are not because of the uneven distribution.
Review the remaining slides. Refer to the speaking notes within the PowerPoint to help you.
Have students complete the Exit Ticket and submit the exit ticket before leaving the classroom.
Tell students to keep a “rationality diary” for a few days to track times when they think they have not been completely rational. Ask them to detail what other factors they think influenced their decisions. Tell them to report back a scorecard – how many decisions did they make as Econs and how many as Humans.