behavioural economics
DESCRIPTION
Slides from Rupesh Parikh's talk at Erevna in January 2014 on the topic of Behavioural Economics.TRANSCRIPT
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Behavioural EconomicsMasterclass by Rupesh Parikh
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Game 1
Would you rather:a) Receive £450 in cash nowb) Have 50% chance of receiving
£1000, but also 50% chance of receiving nothing
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Game 2
Would you rather:a) Lose £450 in cash nowb) Have 50% chance of losing £1000,
but also 50% chance of losing nothing
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Are economists' assumptions good
approximations of real people's behaviour?
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E.g.1 Bernie Madoff
Trader and Broker Reported
abnormally large returns of 5.6% in 2008
$36bn transferred into his fund
SCAM Collapse
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E.g.2 LTCM Investment Firm Run by Merton and
Scholes Nobel Prize
winners for theory of market manoeuvres regarding US and Soviet bonds
Market did not act as empirical suggestions denoted
Bankruptcy
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E.g.3 David Li
Actuary / Quant Mathematical
correlation theory (Gaussian Copula)
Assumed that market would function at all times
Aggregate changed – but the model didn’t
Collapse
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Keynes – Animal Spirits
Decisions often made out of a spontaneous urge to react
Cornerstone of economic theory is consumer confidence
The key, therefore, is to revive confidence in markets.
This should not tip over to arrogance!
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Confidence
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Bubbles
Economic Froth driven by human behaviour acting irrationally
Bubbles are created – don’t match the law of demand!
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Story of 2008...
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Conclusions
Greed ? Is it an animal spirit? Was it rational to start selling sub-
prime? Was it a good idea invest in a bubble
based on other people’s investment?
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http://www.youtube.com/watch?v=bx_LWm6_6tA