Chapter 1

Overall:
Defining rationality
Qualifying and seperating it from the fabled (Homo Economicus)
Rationality is a good enough theory
 
Examples:
Blowjob epidemic
Changes in sexual orientation (or at least the way they are stated)
 
 
Experiments
Kahneman
 The way the choices are phrased. Chance to save 200 rather than definitely kill 400
John List (Disagreed with Kaheman, wanted to test them in more natural settings.
 Collections (Endowment effect, irrationality in inexperienced traders)
 
 
 
Is there such a thing as a Rational Blow Job
What are the incentives?
 
 
Gnnorrhea transmited by penetraitve sex is far more costly, making a female infertile. For oral sex, it
might just be a sore throat.
 
In terms of prices and substitutes
If the price of coke rises, people drink the substitute (Pepsi)
When the price of penetrative/ regular sex increased, the teens went for the substitute, oral sex
 
Study of sex education in the US
Change of incentives for not having sex/ unprotected sex
From pregnancy to spread of HIV/AIDs (more common)
 
Cost of risky sex increases, thus amount of risk sex decreases
 
Factors affecting sex
1. Notification of abortion (raises the cost of getting pregnant and thus the cost of unprotected
sex or even having sex at all)
2. Education about the spread of STD/ AIDS/ HIV
 
We have seen that oral sex can be a substitute for regular sex, but what about heterosexual sex
being a substitute for homosexual sex?
 
Due to aids
Dangerous to men (homosexual)
Dangerous to women (heterosexual)
 
Why do people change their sexual preferences (or at least decide to change what they let others
know)?
 
Incentive: Negative perception of AIDS
Outcome variable: Social/ familiar judgement
Less likely to report that they were homosexual (or heterosexual in the case of women)
Contradiction with genetic theory (those with gay relatives are more likely to be gay)
 
 
Anal sex as a substitute to homosexual sex was preferred by gay men
 
What business do economists have poking around these topics?
Rephrase:
Question: How can economics be a useful tool to solving these questions? Why assume that people
are rational?
 
Helps us to look for ways of changing the incentives so that we can affect their behavior. Basis upon
which laws/ policies are formed
 
Even when we are not completely rational, they are rational nearly and often enough for the the
assumptions of rationality to work.
 
Weigh the following
 Cost
 Benefits
 Total Budget
 Future consquences of present action
 
We choose differently based on the way the choices are framed
 
Kahneman experiments
Irrationality due to the only the phrasing of the choices affecting the choices made
 
John List
2x "Field experiments in a more natural setting.
1. Convention for trading cards/ pins
 Endowment effect.
 People give a higher value to something that they already own. Would rather not trade the
pin they already earned, even thihg they didn
2. Hiring people to do data entries and door to door delivery
 Unexpectedly higher wages lead to harder workers, but not for long. After awhile, they
reverted to type
 
Rat Experiment done by Battalio, Kagel and Kogut
 
 Proof that "Giffen Goods" exist
 Drank more quinine water than root beer even though the price increased (considerd a
rational decision as the price of root beer is still higher/ the servings of tonic water are still
higher per unit price)
 The rats not only responded to the changes in price, but also the constraints of their budget
(The total number of time they can press the lever)
 
 
What are the best ways to deal with criminals
 
Does prison really work
 Form of revenge
 Incapacitation effect (If the criminal is locked away, he's off the streets and can't do much
harm to you
 
Comparing the crime rates when ages of criminals transition to the age of majority in that specific
state/ county
 
 When they reach that particular age, they "mature" so to speak, as they no longer go to
juvenile detention centres, they go to jail for real
 This immediate effect can only be explained by the deterrence effect of the prisons, not the
incapcitation effect
 Building more prisons will not necessarily solve the issue, the threat of much harsher
sentences as an adult does, forcing them to give up crime as it pays less
 
Rational crime theory
 
Are prostitues rational?
1 in 800 mexicans have HIV, 1 in 300 prostitutes meet with a HIV positive client, 2% chance to catch
an STD, 1% chance to catch HIV
BUT, 25% increase in pay
 
Weighing the costs and benefits, 25% vs 2%/1%, the prostitutes are actually making a rational
decision by having bareback sex
 
Staff Sergeant Matthew Kruger
 
Marriage strained by absences
Risk of dying/ serious injury by serving military tours in war zones
 
However, when weighed against the health insurance offered by the army, it is worth it as he can
support his 3 kids

Fundamentals of Economics (In this case, rationality)

 People respond to incentives
 
Peltzman's Studies
 
On Seatbelts and airbags
With safety equipment/ features in the cars, people drive less carefully
The cost of an accident has been reduced. Lower chance of injury and dying
Thus, incentive drives people to drive more recklessly
 
Less deaths per accident but more accidents on the whole, essentially the number of deaths remain
unchanged.
However, pedestrian deaths increased on the whole as they do not have the safety equipment while
walking.
 
Cancelling out and balancing effects of incentives
 Not just limited to seatbelts and drivers
 Better healthcare lowers the cost of being unhealthy, more people choose to be unhealthy/
or less choose to be healthy
 Protection reduces the cost of sexual encounters, sexual encounter frequency goes up

Chapter 2

Question: If money is not the most effective thing to motivate people, what is?
 
Examples:
Bonus's in the workplace
 Doctors refuse the harder/ more risky or difficuly surgeries to maintain their high success
rates so they can have higher bonuses
 Workers might view bonuses as manifestations of bias from their bosses
 
Three Parables offered by the author
1. Dirty Dishes
2. Car Salesman
3. Parking Ticket
 
Dirty Dishes
 
Argument:
 Payment is counterproductive in tasks that require higher levels of intrinsic motivation.
 Replace that wish extrinsic motivation (monetary incentives) and you get less work done.
 Payment changes the relationship between parents and children. Seen as a boss rather than
an object of deserved loyalty (a leader in the family). Market relationship
 
Conclususion: Praise is the best way to elicit the behaviour desired
 
Non-monetary vs non monetary
Praise vs lecturing. Lecturing is less likely to get the job done, as it is seen as a punishment to not
being clean. While praise is seen as a gain in identifying as clean and conscientious.
 
Argument: Monetary incentives do not work as they contradict (or rather, the act of trading
everything in markets) contradict some of our most cherished values
 
Car salesman:
 Monetary incentives actually work. No one sells cars for a sense of pride and
accomplishment, they do it purely for profits.
 The more they earn, the more their company/ boss earns.
 Thus, they are naturally motivated by higher salaries/ bonus
 
Parking Tickets:
 When different cultures and different values affect how incentives motivate people
 In this case, diplomatic immunity
 
Diplomats with no parking tickets
Developed countries: Netherlands, UK, Ireland, Sweden, Norway, Japan
 
Reasons: Social capital? Diplomats from those countries view themselves as people
 
Diplomats with parking tickets
Less developed countries/ countries with high ratres of corruption: Albania, Senegal, Pakistan,
Angola, Mozambique
 
If they view themselves as above the law in their own countries, they would likely feel the same way
in a foreign country as well
 
Same incentive, so what happened?
 
The cultures of countries are different, this means their values are different as well. They will view
what is at stake differently.
 
The more corrupt and poor a country is, the more special the treatment their diplomats receive back
home. They have made a living by being corrupt, neoptism and being above the law.
 
Behavior is also a measure of how favorably the host country is viewed by the diplomats
 
Chapter 3

Main Aims of the Chapter

 What does Truth means in Economic terms
 How does it lead to efficiency
 Shortcomings of efficiency
 Why efficiency doesn't always lead to fairness
 Why we have taxes (They are lies and they interfere with truth)
What does Perfect Competition ensure?
1. Companies are making things the right way.
2. Companies are making the right things.
 The price of a product equals the cost to make it.
3. Things are being made in the right proportions.
 The competitive rule—price equals cost equals value to the consumer—keeps things
efficient.
4. Things are going to the “right” people.
 Notice that here I am equating “right” with “efficient,” an assumption we’ll examine and
challenge shortly.
 
 
Life without markets and the Non Market system
What would happen if we no longer have markets?
 
Government Provision/ Interference in the free market:
 
Education :
 
Example: In Britain, government-run religious schools often have the best
academic records, so atheists take their children to church every Sunday in
order to get good references from priests and get their children into these
schools.
 
There is actually a willingness to pay for good schools, but with the government intervening, the
payment goes instead to the landowners/ house owners in the area. Thus, the schools do not benefit
 
Free Markets vs Non Market system
 
Conclusion: Sometimes the loss of information is worthwhile because it is offset by
gains in equality or stability. While other times the loss of information an economy, and a society,
floundering in waste and confusion.
 
Efficiency vs Fairness
 
How to deal with them and how NOT to deal with them
What doesn't work:
 Subsidies
 Taxes
 
Taxes are supposed to help to redistrubute income, but at the same time cause inefficiency in the
market
 
Examples:
President Roosevelt’s “New Deal” programs of the 1930s expanded the role of the United States
government, in response to the Great Depression.
In Britain, Clement Atlee’s postwar government took control of much of the health, steel, air travel,
petroleum, rail travel, and telephone industries.
 
"Headstart" theorem by Kenneth Arrow
The 2nd Fundamental Theorem of welfare economics
 
The market can be made fair and efficient as long as we give some parties a headstart
 Through the useage of Lump Sum payments/ taxes
 By adjusting the starting positions and then letting the market system run its course without
any interference, this leads to a pareto efficient outcome
 Nothing one can do about it, unlike an income or sales tax. This means it will not change
rational people's behaviour.
 Thus no efficiency loss, people still buy/ sell products and pay the taxes
 
How feasible is using the headstart theorem in real markets?
Real world markets have complex workings with many goods and services
 Education etc
Practical vs Impractical examples
 
Impractical:
Need to calculate the lump sum tax for the person before they are born
Ideally it would have been decided before Tiger Woods was born, because if he could have predicted
that he would be liable for a tax as a result of his success he might have chosen a different
profession. Behavoir is changed
 
 
Practical:
Increasing the fuel tax , as fuel demand is rather price ineleastic and this doesn't change people's
behavoir much
 
In a typical winter in Britain twenty-five thousand seniors die as a result of inadequate heating. To
address this concern, domestic fuel is subject to lower taxes than many other things. This is an
example of "running backwards"
 
Instead the domestic fuel should be given higher sales tax
 
However, give a lump sum subsidy to the elderly, for whom fuel demand is slightly more elastic.
They may choose to go cold rather than spend extra money they cant afford to on fuel.
 
Example: 1950s Montana vs present day, snowfall is getting lower and lower
 One of the reasons is that societies do not think there is a problem to react to
 "Landscape Amnesia" Author's home in Montana
 Changes are gradual and subtle and people compare them year on year instead of to the
starting state
 
Counterexample:
 Speed of deforestation in Tokugawa Japan made the shoguns recognize the damage and the
need for preemptive action
 
Another reason is "Rational Behavior"
 People advance their interests at the cost of others
 The perpatrators reap big immediate profits, while the loss is spread out to the others
 The losers don't fight back as, individually there is little to gain
 Perverse subsidies: Only reason these industries are profitable/ surviving/ ecnomics is
because of the subsidies provided. Fisheries, sugar growing and cotton growing
 Taxpayers are the large number of losers, but per capita it is just a small amount on the tax
bills. The perpertrators (Fishermen), lobby vocally as the benefits are large for them
 Simply put, selfishness
 Example: Introduction of pikes into western montana lakes, destroying trout populations
 More likely in democracies that bestow 'swing power' on sime small groups.
 Examples: Senators from small US states, small religious parties holding the balance of
power in Israel
 In 1971, mines that had polluted the rivers of Montana with their waste (arsenic, copper and
acid) declared bankruptcy, as this would shield them from the need to do cleanup. This ended
up causing the citizens of montana to incur 500 million in costs
 
Tragedy of the commons vs Prisoners Dillema and Collective action
ToC:
Shared resource, a commons
People should practice restraint and not overharvest
But they do not, due to lack of effective communication, causing it to decline or even disappear
 
Prone to arise when the principal consumer has no long-term stake in preserving the resource but
society as a whole does.
Commercial Logging
 Short term leases
 Do not folow up on replanting agreements
 In their best interests to do so as quickly as possible
 Much of Borneo, Solomon Islands, Sumatra and Philippines
  Good for loggers, bad for local people as they lose their forests products, and suffer from the
consquences of soil erosion and stream sedimentation.
 
 
Behind happy outcomes with regards to common resources lie 3 alternative arrangements
1. Government to step in
 Example: Shogunate in Tokugawa Japan
 Inca emperors in the Andes
 Princes and weathly landowners in 16th century Germany against logging.
 Disadvantages: Impractical in some cases due to excessive administrative and policing costs
2. Privatization
 Dividing equally into individually owned units, incentive for the owners to upkeep them and
use them with restraint
 Example: village owned forests in Tokugawa Japan
3. The Ideal world
 Get people to cooperate. Recognize their common interests and to design, obey and enfore
prudent harvesting quotas on their own
 Conditions: Homogeneous, learned to trust and communicate with each other, share a
common future and to pass on the resource to their heirs
 NOT GONNA HAPPEN LMAO
 
Examples: Montana water right for irrigation. Ranchers obey their elected water commisiioner and
no longer take it courts for settlement
 
Tikopia Islanders, New Guinea highlanders, members of Indian castes, Icelanders and Tokugawa
Japanese lived in relatie isolation, thus ISEP is not a good line of thought to have

Chapter 5

Experiments are not as good as reality in replicating high stakes

 Even going to a low income country and offering a frw months worth of wages is nothing
compared to that of buying a house, car or getting married
 However, game shows can show us stakes on the level we need
 
House Money Effect
 People take more risks when they think they are ahead in the game
 
Example: Dutch gameshow
Chasing millions, 3 versions, dutch, german and american, Deal or no Deal
 
Utility Theory vs Prospect Theory
Path dependence of the decision

Prospect theory was the clear winner, but people were not extremly loss/ risk averse, they were
moderately so. Even offers from the bankers of up to 70% of expected value were turned down.
 
Equity Premium Puzzle Risk
 
Path Depence
 2 Cases which induce people to be more or less risk seeking
1. Playing with the house money
 2. Have a chance to break even from behind
 
Those facing big losses or have big winnings are more risk averse
 
What is interesting is that playing the game and making decisions publicy made people less risk
averse rather than the other way round.
 
Golden Balls
 Still almost up to 50% cooperation rates even with 100k odd jackpots
 Playing for peanuts effect
 When contestants feel they are playing with low, almost insignificant amounts in the context
of the show, they will just decide to split( golden balls)
 take the risk to continue gambling (deal or no deal)
Why do people perform such acts?
 Reciprocal Altruism? Unlikely, due to the high risk of dying, which can't be recriprocated in
any meaningful way (Similar to US Congressional medal of honour)
 Kinship? No, as the Carneige medal has a condition that one cannot be a relative of the
victim/ one who has been rendered assistance
 
Field Experiments on Honesty
Example:
Lost Wallets
Harvey Hornstein Experiments
 Generally high return rates
 Wording of letter affected the willingness to return (the second time). Although it shouldn't
have
 Argument by Hornstein: The writer of the letters serve as a role model for the experimental
subject
 Argument by WW Norton: The negative emotions expressed by the letter's writers serves to
evoke emotions that we relate with our experiences with negative people
 It is emotion and not reason that results in this decision.
 Rationally, such feelings would not have a effect on the decision
 Thus we can see these people are acting irrationally
 When Robert F kenedy was murdered, not one of the wallets was returned
Irving Piliavin Experiments
 Collapsing on the train
 Whether drunk or ill, people still came to their aid
Bibb Latane/ John Darley Experiments
 When there was an unresponsive bystander, even less people came to help
 
Kitty Genovese Revisited
 38 Witnesses
 Yet none came to help
 
Comparing to the previous examples
Latane and Darley propsed that there was a diffusion of responsibility
 Pressure to act does not focus onto any one person alone
 Less likely for a response to occur
 
However, in Pilliavin's experiments, there were at least 8 people per train cabin/ carriage. Thus
diffision of responsibility does not seem to be the case here
 
Insteasd they suggested that it could be because they all knew no one else was related to the victim
and that no one would come to their aid
For Latane and Darly, they may have assumed the passive bystander alongside knew the victim.
 
In the case of Kitty Genovese, no one could have known that no one else had gone/ was going to her
aid. They could not see, only hear the screams. They might have assumed that the police has already
been called.
"People want someone to come to their aid, but they don't want to be that someone"
"Surely someone would have acted"
 
 
Free Rider Problem
Examples:
Donations are public goods
 But for each dollar a government supports to a charitable cause, donations only decreased
by 28%, not by the same amount
Multiplayer Prisoner's dilemma
 
Economists as Free Riders
Commitmment model
 Decisions need not be rational
 They can be based on emotion rather than reason, yet be beneficial
 Rationalists might be excluded from profitable exchanges
 
Self-Interest Model
 Inroads into PolSci as well
 Voting
Example:
Studies by Political Scientists David Sears, Richard Lau, Tom Tyler and Harris Allen:
 Who the voters choose is not dependent on the personal gain/ cost. Umemployment,
healthcare costs and the potential school environment of one's own child did not affect it
 Single Person's vote will never change the outcome of the election
 They are free riders if they stay home.
 Fundamental Incentive problem: "My vote would make no difference anyway"
 Yet people still turn up to vote, even when the rational thing is not to do so
 Brian Barry, Political Philosopher: When elections are likely to be close, more people will
turn out to vote
 But even then, the election will not be decided by the odd vote
 
What if we raise the stakes?
People might act irrationally when the costs are low. Thus they are less self interested
Example:
Shalom Schwartz, Bone and Marrow Donation
 No relationship between whether they are frequent blood donors on their decision to
donate the marrow
 Some of the people declined due to the vague description of the recipient, but they were
still initally willing to
 They spent up to 10- 15 minutes debating and making their decisoon
 Undergoing surgical procedure is not a trivial cost like voting, returning a wallet etc.
 
Even when the stakes are high, they do not refuse.