+Αργυρης Χατζηηλιας there were at least 2 different ones that I saw just in this episode which makes me wonder 1.) how many he has and 2.) just how big a fan is he?
The main points : 1.Bounded rationality🧠 2.Lack of information🤷 3.Manipulate non interinsic attributes of price💝 4.Framing effect💍 5.Psychological pricing👨🏫 6.Nudge theory😕 7.Risk(neutral & averse)🤑
When I started my first economics course, I thought that the basic assumptions of classical economic theory were stupid. Humans are not rational beings, just that we have the capacity for reason. Our behavior is at times predictable, meaning that the majority of us can be manipulated by others. I feel one of the first things economics students should learn is behavioral economics (but I think it should be common sense anyway). I'm glad that Crash Course decided to make this video, so I thank you on a job well done.
+Andre Lee Real economists don't usually rely on classical economic ideas -- instead, they construct new mathematical models tailored to specific problems.
+blownspeakersss I know that, and I greatly respect that part of economics. As a lover of mathematics and computer science, specific algorithms and objective models make sense. My problem is not with modern economists, but with the way it is taught. I feel irked by the introductory focus on classical economic thought (my textbook almost has an obsession with that). I know it's important, but the fact that it doesn't adhere to what I or my peers have experienced in life, seriously alienates us from really loving the subject and trying to find real-world applications.
I still think the rational decision-maker is very useful most of the time. But there are instances where biases kick in and are crucial to explain the economic phenomena.
Corporations are masters of behavioral economics. They know what will make consumers behave irrationally and against their own interests and they capitalize on that. They know that they have an information advantage over essentially everyone, and they capitalize on that. Particularly in labor they make sure labor has less information than they do. Every boss tells you "never discuss your salary with anyone else" That's market manipulation.
+Paul Peterson Yeah it quite interesting that businesses knows this very well. But the economist that tend to be very pro business and anti-state control tend to ignore these factors. It is almost like there trying to cover up how businesses exploit irrational behaviour. (Though I think a lot of it is just ignorance.)
@@Ryosuke1208 it's hard being open about one's wages. I generally am, although I don't like when my little brother brings up the question in front of people who don't need to know, like other kids and adults. I'm very capable of sharing such information with other adults, but kids don't need to know.
Yet mainstream economics worship the free market and says everyone is rational and good in the sense that we're all angels and won't do bad things like what you said.
If you’re into this stuff, check out the paper “Prospect Theory: An Analysis of Decision Under Risk” by Daniel Kahneman, Amos Tversky. It was a game changer!
Def my favorite CrashCourse. Behavioral Econ and Game Theory are my favorites in Econ so far, both in Crash Course and when I study Economics in general.
I have watched all of your episodes so far and I have to say they are extremely informative. I don't know what I would have done without them. Thank you for making these
Public - "Pollution is killing us! Stop pollution" Business - "We can reduce pollution but it'll increase our costs which will raise prices for consumers" Public - "We don't want to pay." Government - "We can force businesses by law to stop pollution" Public - "Stop big government!" Public - "Stop pollution!" Yeah, people are rational.
Nudge theory, of course, should not be confused with noodge theory. Noodge theory is a formula for figuring out how much grief your mom will give you for forgetting to phone her.
When discussing rationality in TH-cam comments, make sure to keep in mind that it's not conventional rationality or logic that is being referenced in these discussions. It's simple logic, meaning a>b and b>c, so a>c. Don't go into discussions based on your ideas of common sense or rationality.
All discussion about economics is political, due to the fact that it is a social science, and studying society implies studying people with different ideals and perceptions. Every economic theory applies slightly differently depending on the society it's in, the only unbiased way to present it is to take no example at all, or to admit the example is purely fictional, in which case it becomes abstract math, it isn't economics anymore. So, while I love these videos as well, they are still political if we consider them to be about economics.
Economics is Political. The first Economist were studying Politics, like Adam Smith and Karl Marx. Politics is the study of how to distribute resources and Economics is the study of those resources. They are intrinsically linked.
So, in a way, classical economics is like classical physics as in that it explains the COLLECTIONS of instances, the combined effect, the big picture. Whereas behavioral economics is like quantum physics, as in that it deals with individual instances, that may be difficult or impossible to predict.
Thomazo Not really, that’s a bad comparison. I think you mean Neo Classical Economics. Classics Economics is typically synonymous with Political Economy. The Neo Classical Economics is the mainstream Economics taught in Undergraduate college Micro Econ courses. Theres a heavy emphasis on simplifying assumptions about rationality that Behavioral Economics challenges
Arguably 7:29 supports cost/benefit thinking because in the experiment, food that's less convenient to reach requires more effort to get which could be considered cost. The food that is easier to reach and therefore has less "cost" seems to be more popular.
Just a quick note. From what I understand, electron 'orbits' are actually just probability distributions. We call these "orbitals" which is kind of a misnomer. As for classical mechanics, yes it can tell us a lot about gravitational situations, but they weren't so good with Mercury. I guess that would be a better analogy. Mercury was a challenge for Newtonian mechanics rather than electrons.
The problem with gathering information about a product is making sure the information is accurate. Businesses have an incentive to put their best foot forward and avoid any negative news. Companies have been known to flood review sites with fake reviews and put legally required nutritional information in a hard-to-find spot. Look at how small "artificially flavored" is on the next fruit product you buy.
I read an article about the ultimatum game. Declining an offer makes sense if you play with someone you know because social agreement is a recourse that people value.
This is amazing I was just looking at the book Nudge yesterday. Love this topic. I'm an MBA student in Chicago and I'm beginning to realize I love Economics more and more. I wonder how this applies to the Armed Forces. I'm in the Army and this topic may be worth a closer look there. #DFTBA #Nudge #behavioraleconomics
Classical economics operates mostly on 'ceterus paribus', but as the world become more complex, more factors can't be ignored and multiple theories emerged into new understanding (Complexity Theory)
Classical economic theory still holds true for most of the phenomenons explain in this video. Framing is the instance for which further deliberation from my end is needed. Take for instance risks, and let us assume a utility function as follow: f(x) = x*p ; where x = cash and p = probability 1. You can indeed take the 50/50 bet of obtaining either $100 or $0. 2. Otherwise, you can simply opt to receive $50. The expected utility for both options is $50 as (easily) proven below. f(100) = 100*.5 = 50 f(50) = 50*1 = 50 What this video tries to illustrate is that if you were instead given the choice between {1. You can indeed take the 50/50 bet of obtaining either $100 or $0. {2. Otherwise, you can simply opt to receive 50>n and you decided to choose the second option, you are an irrational consumer because your expected utility would be less than 50. BUT Economics teaches us that individuals can obtain or lose utility from anything. In this case, we can adjust our initial equation by including the utility humans may get from certainty (indeed, this is implied, but reasonable nonetheless). If we input such benefit someone may get into the equation, we can end up with an equation as such: f(x) = x*p + 10*p Note: the number 10 is hypothetical and should be determined on an individual basis. The new equation depicts that this specific individual obtains more utility from certainty (aka more probability of getting money), and can gain up to 10 units of utility. Under this new model that takes into account the utility a person gets from certainty, the rational decision is to choose the $50 payout. f(50) = 50*1 + 10*1 = 60 > f(100) = 100*.5 = 50 Yet again, microeconomics is truly based on implications and the rationale behind it will never mirror the world we tread. Hope this provoked some thought and changed the way you perceive decision making.
Refusing the inegalitarian split of money is entirely rational. Far better to lose a buck than create the precedent of being easily exploited. Choices aren't usually made in a vacuum.
+Wiggum Esquilax You're assuming people would know about your decision, or that they would have to make it more than once. I think that if people were told that nobody would know about any of this and it would only be a one time thing, they would have made the same decisions, proving that they would rather not receive any money to make things fair than receive a small amount of money. The game could change, however, if they thought that it would be a disadvantage for the other person to receive more money than they did, which can be the case in lots of scenarios, but not this one.
I took this video very seriously but on the more light side of things - am I the only one who thinks this guy really reminds of Marshall from How I Met Your Mother?
The 100$ gamble vs. 49$ certainty is actually perfectly rationnal when you take into account the law of diminishing returns that you mentionned earlier. 100$ might give me 6 utils, and 50$ might give me 4 utils. 50% chance to have 6 utils isn't as good as 4 utils.
Saying physics is the same because Newtonian laws don't hold up on a quantum level is really fucking stupid. Nobody ever used Newtonian physics on quantum mechanics. because we know, and knew from the beginning it wouldn't held up.
+Ward Huyskes He was trying to give an example as best as possible. Since behavioral economics is a real subject most marketers use to their advantage, so far the laws of demand would have to hold up to be true - most of the time.
Reimu Hakurei no he tried to explain that the inaccuracy of laws is not unique to economics, in which he claimed that physics laws aren't always true. Which is just plainly wrong.
+Ward Huyskes I think it was an excellent analogy. The Newtonian model is outdated and flawed, but it's still good enough to explain the behavior of the material world around you in many aspects. The Classic Economic model is outdated and flawed, but it's still good enough to explain the behavior of consumers in many aspects. Quantum Physics and Behavioral economics are newer models, built on the old ones, that add several more layers of complexity in their respective fields. Nobody ever used Newtonian physics on quantum mechanics because quantum mechanics are specifically explored to answer the questions that the Newtonian model couldn't answer. The same applies for economics. Criticizing this analogy and calling it stupid is really fucking arrogant, Mr. Cooper.
+Ward Huyskes Physical laws all involve assumptions and approximations, and physicists did indeed try to apply classical laws to quantum mechanics; see for example the "ultraviolet catastrophe" which led to Planck proposing quantization as a solution, and Dirac eventually applying relativistic mechanics to the electron. The "universal law of gravitation", which Newton had pointed out works on earth as it did in the heavens, won't work on smaller scales? Well, let's see, if we take a point mass...
You should have mentioned that people reacted very differently in the ultimatum game depending on cultural influences! Not only do economists have a gap of knowledge with behavior, they have a gap of knowledge of the behavior of anyone outside of North America.
***** why shouldn't they have to give up a portion of their wealth? they have a lot of it, more than they could spend over a dozen lifetimes, and most of them lack the moral backbone to voluntarily give it
If getting a medical treatment cost $10,000, without proper taxation, you'll have to pay $10,000 all by yourself. But with proper taxation, you'll actually pay less than $10,000 over your lifetime (with middle class wage) and get a free medical treatment multiple times. I think that's a good deal. Just because a treatment cost $10,000 doesn't mean that you'll have to pay $10,000 in tax to make it free; that's because most of the tax burden will be from the upper classes.
Mickey G Plenty of taxes benefit everyone, infrastructure and education benefit everyone. If taxes didn't pay for healthcare then poor people couldn't afford it, and they'd all be sick. And people that are sick aren't going to care about buying anything but necessities and saving every remaining dollar for medicine. Farmers are going to charge more for food because they need health care too, everyone is making less stuff and charging more, GDP collapses and a superpower country reverts to a third world country.
The instinct for risk aversion makes sense. I'm doing OK right now. Winning more would be great but I don't know if I can afford to lose, so even if the wins would outweigh the losses long term, I can't guarantee that I can survive a loss. I think we evolved to have risk aversion. Those that risked didn't survive.
Curious, in the 3 groups bonus experiment, won't it have a negative impact on morale for the 3rd group? So while it might work out in the short term, I'd expect a higher quit rate for the third and perhaps degradation of performance over time. Granted, I understand the point you are trying to make. But I'd rather not people see this and try to apply it only to be adversely affected later.
I should point out that people in different countries behave differently and that models and theories that discussed in this video may not always apply as easily as shown. A good example is the difference politically, culturally, and economically between the UK and USA.
The standard example for this topic used nowadays is the "rested XP bonus" in World of Warcraft, which gamer love! It was actually a "played for too long penalty" during the WoW beta and beta-tester hated it with passion. The game designers didn't change any number, just the name of the mechanic.
It makes sense logically if someone knows a bad deal wont be accepted then they will want to make a good deal as that is worth more than nothing. it is only irrational in the short term as sometimes people don't always realise a fair deal is necessary. To get any money
For good reading on the cafeteria food-choice results as well as other interesting factors that subconsciously influence what and how much we eat, I recommend works by Brian Wansink including Mindless Eating: Why We Eat More Than We Think.
ive not particularly liked the series, but this episode is good. i think its because there's less of the unnecessary funny antics that can get rather cringey. not to say its bad, but its just my opinion. keep up the good work!
+Bigdawgphilleep Gamblers fallacy doesn't necessarily apply here, the chance of losing 100 times is so unlikely that is fair to assume you have an equal chance of winning/losing overall.
+Bigdawgphilleep Here's why it's much better to play as many times as possible: 1 flip: -50% chance of losing $50 -50% chance of winning $100. 2 flips: -25% chance of losing $100 -50% chance of winning $50 -25% chance of winning $200 3 flips: -12.5% chance of losing $150 -37.5% chance of breaking even -37.5% chance of winning $150 -12.5% chance of winning $300 4 flips: -6.25% chance of losing $200 -25% chance of losing $50 -37.5% chance of winning $100 -25% chance of winning $200 -6.25% chance of winning $400 And so on... Each time you flip the coin, you have the same changes of increasing your prize or decreasing, but because the increase is always bigger than the decrease (+$100 vs. -$50), you will end up winning money on average.
In the words of the Stand-Up Economist, "People aren't rational. People are stupid." Admittedly the context is different, but I posit that it's a pretty good explanation of why Behavioural Economics is important.
"Applied to" - Let's face it, the Hierarchy of Effects, already a part of Marketing, confronts this issue effectively and has been doing so since the 1950s.
Great video I'm currently doing my master's degree which relates to behavioral economics, and it would be awesome if you can provide us with the references you used to create the video so we can read more about it :)
The policy implications of this are quite interesting (and ideologically charged). The extent to which you believe human irrationality undermines the idea of the market operating sustainably without interference will go towards determining how much regulation in the economy is felt appropriate. (Although there are some people who think the free market is fundamentally flawed, but gov't intervention is just worse)
Rose Erin Well no, but that wasn't really what I meant. Nobody really argues that the market would benefit from gov't failure or vice versa. What is more disputed is the extent to which a free market can do just fine on its own. At one extreme you have Neoliberal/liberarian thinkers who argue that essentially any intervention in the economy is negative - to the point of some disliking central banks themselves. . At the other end you have Keynesian and Regulation theorists who argue that the capitalist system is inherently self-destructive without the right social and economic policies in place.
Bottom line as with my Industry Landscape Architecture and Urban Design, 'Its about people...stupid'. I spend so much time talking to clients about just people and their often irritational, emotion based ways, with all the present cognitive research we can actually improve the experience of the majority by small nudge changes, the classic being desire lines.... A really excellent video...this type of behavioral science needs to be at the centre of more industries to avoid a seemingly rational expectation to an often irrational end user. This is a huge subject as we have the nature, nurture, environment, expected cultural rules, length of time for a decision, empath or sociopath and everything in between.... It's ultimately not about boxes, but evolution and a framework to be adapted as we evolve, messy sometimes for sure, but a lot less damaging than dictact's from above....
LOL! If I tell my employees that they have to pay back their bonuses if they fail to meet the goals, they would probably quit. Can I get them to sign something legally binding?
If you raise the price of a product and that make it sell more, that means you increase the demand of one sector of the population that wasn't interest before, meaning the law of supply and demand it's still a law.
That AC/DC belt ... 😂
+Αργυρης Χατζηηλιας there were at least 2 different ones that I saw just in this episode which makes me wonder 1.) how many he has and 2.) just how big a fan is he?
+roguedogx good one lol
Did you notice the color change between the beginning and the end?
he wore it in the last video, too.
He wears it in every episode!
Finally! This is the sort of economics lecture I have hoped to learn. Thank you. This explains a lot I've wondered about for years.
The main points :
1.Bounded rationality🧠
2.Lack of information🤷
3.Manipulate non interinsic attributes of price💝
4.Framing effect💍
5.Psychological pricing👨🏫
6.Nudge theory😕
7.Risk(neutral & averse)🤑
a good read for this,
Thinking, Fast and Slow by Daniel Kahneman
I've seen a lot of good books on behavioral econ lately. It's really coming into its own.
I've seen a lot of good books on behavioral econ lately. It's really coming into its own.
Yes!
Afiq Azraei I had that book a year ago.
been there, done that
When I started my first economics course, I thought that the basic assumptions of classical economic theory were stupid. Humans are not rational beings, just that we have the capacity for reason. Our behavior is at times predictable, meaning that the majority of us can be manipulated by others.
I feel one of the first things economics students should learn is behavioral economics (but I think it should be common sense anyway). I'm glad that Crash Course decided to make this video, so I thank you on a job well done.
+Andre Lee Real economists don't usually rely on classical economic ideas -- instead, they construct new mathematical models tailored to specific problems.
+blownspeakersss
I know that, and I greatly respect that part of economics. As a lover of mathematics and computer science, specific algorithms and objective models make sense.
My problem is not with modern economists, but with the way it is taught. I feel irked by the introductory focus on classical economic thought (my textbook almost has an obsession with that). I know it's important, but the fact that it doesn't adhere to what I or my peers have experienced in life, seriously alienates us from really loving the subject and trying to find real-world applications.
I still think the rational decision-maker is very useful most of the time. But there are instances where biases kick in and are crucial to explain the economic phenomena.
You guys make complicated theories look incredible easier than they are. Thanks a lot.
Obviously that Belt buckle falls into the category of "irrational decision"
Corporations are masters of behavioral economics. They know what will make consumers behave irrationally and against their own interests and they capitalize on that. They know that they have an information advantage over essentially everyone, and they capitalize on that. Particularly in labor they make sure labor has less information than they do. Every boss tells you "never discuss your salary with anyone else" That's market manipulation.
+Paul Peterson Yeah it quite interesting that businesses knows this very well. But the economist that tend to be very pro business and anti-state control tend to ignore these factors. It is almost like there trying to cover up how businesses exploit irrational behaviour. (Though I think a lot of it is just ignorance.)
I heard that first on "Adam ruins everything". He basically says that people often prefer to talk about sex than talk about their salaries.
@@Ryosuke1208 it's hard being open about one's wages. I generally am, although I don't like when my little brother brings up the question in front of people who don't need to know, like other kids and adults. I'm very capable of sharing such information with other adults, but kids don't need to know.
Yet mainstream economics worship the free market and says everyone is rational and good in the sense that we're all angels and won't do bad things like what you said.
@@therealnoodles7638
Nope.
If you’re into this stuff, check out the paper “Prospect Theory: An Analysis of Decision Under Risk” by Daniel Kahneman, Amos Tversky. It was a game changer!
They forgot a third attitude towards risk. If you take the envelope for more than $50, you are called Risk Seeking.
Nudge, by Richard Thaler, has also been a joy to read!
"Only 25% fat", had me keeled over with laughter. Thank you Crash Course for another fantastic video, keep up the great work.
I scrolled down to the comment section just to find this!
My favorite field of Economics! Thanks guys, loving the work!
Def my favorite CrashCourse. Behavioral Econ and Game Theory are my favorites in Econ so far, both in Crash Course and when I study Economics in general.
Mongols are the exception to Behavioral Economics.
Waltham1892 lol
Haha
*mongoltage*
I have watched all of your episodes so far and I have to say they are extremely informative. I don't know what I would have done without them. Thank you for making these
behaviour economics is sexy
ifkr it makes so much sense and also makes economics in general more easier to understand.
Public - "Pollution is killing us! Stop pollution"
Business - "We can reduce pollution but it'll increase our costs which will raise prices for consumers"
Public - "We don't want to pay."
Government - "We can force businesses by law to stop pollution"
Public - "Stop big government!"
Public - "Stop pollution!"
Yeah, people are rational.
Reducing pollution is like reducing the deficit. It's not gonna work unless it's completely halted
+Nolan Thiessen lol yep
+Nolan Thiessen that or simply not unified.
Don't generalize
***** You have to generalize in a macro economic setting.
These two old people drinking wine ( minute 3:05 ) are one of your favourite aren't they?
+Christoph Geske They are our favourite, bar none. -Thought Café James
finally, some economic lectures that are less theoretical and more on the practical side :)))
Nudge theory, of course, should not be confused with noodge theory. Noodge theory is a formula for figuring out how much grief your mom will give you for forgetting to phone her.
Gave me a good chuckle. Thanks, mate.
The Ultimatum game is a Newcomb-type problem. If people think you won't accept an unfair bargain they're more likely to offer a fairer one.
okay, up to this point i was undecided on crash course econ, but you guys killed it on this one. very well done.
Do you mean you like it or don't?
+Nicolino Will He likes it.
+Nicolino Will His undecidedness dies.
rip
Nicolino Will i liked it. this is the first one that i thought they were putting together useful and fundamental information.
This was probably the most interesting video yet! Thanks guys!
When discussing rationality in TH-cam comments, make sure to keep in mind that it's not conventional rationality or logic that is being referenced in these discussions. It's simple logic, meaning a>b and b>c, so a>c. Don't go into discussions based on your ideas of common sense or rationality.
I like these videos! All of them. Thank you for keeping the politics out of it.
yes thank you for this series. is it weird that this is what I watch when I can't sleep at night?
All discussion about economics is political, due to the fact that it is a social science, and studying society implies studying people with different ideals and perceptions.
Every economic theory applies slightly differently depending on the society it's in, the only unbiased way to present it is to take no example at all, or to admit the example is purely fictional, in which case it becomes abstract math, it isn't economics anymore.
So, while I love these videos as well, they are still political if we consider them to be about economics.
Economics is Political. The first Economist were studying Politics, like Adam Smith and Karl Marx. Politics is the study of how to distribute resources and Economics is the study of those resources. They are intrinsically linked.
@@emoore29681 If its weird, then I am weird too
So, in a way, classical economics is like classical physics as in that it explains the COLLECTIONS of instances, the combined effect, the big picture. Whereas behavioral economics is like quantum physics, as in that it deals with individual instances, that may be difficult or impossible to predict.
Thomazo Not really, that’s a bad comparison. I think you mean Neo Classical Economics. Classics Economics is typically synonymous with Political Economy. The Neo Classical Economics is the mainstream Economics taught in Undergraduate college Micro Econ courses. Theres a heavy emphasis on simplifying assumptions about rationality that Behavioral Economics challenges
Good intro to the topic. Have to say I particularly liked nyan-mongol :-)
Thanks. This was the best CCM Economics yet!
I kept expecting them to point out that the most irrational decision of all is this man's belt
Nice ACDC buckle.
Arguably 7:29 supports cost/benefit thinking because in the experiment, food that's less convenient to reach requires more effort to get which could be considered cost. The food that is easier to reach and therefore has less "cost" seems to be more popular.
i really love the last experience with bonus
Just a quick note. From what I understand, electron 'orbits' are actually just probability distributions. We call these "orbitals" which is kind of a misnomer. As for classical mechanics, yes it can tell us a lot about gravitational situations, but they weren't so good with Mercury.
I guess that would be a better analogy. Mercury was a challenge for Newtonian mechanics rather than electrons.
+Matt Smith That is what I was thinking. They could have talked about General Relativity instead; but that was not the point.
The problem with gathering information about a product is making sure the information is accurate. Businesses have an incentive to put their best foot forward and avoid any negative news. Companies have been known to flood review sites with fake reviews and put legally required nutritional information in a hard-to-find spot. Look at how small "artificially flavored" is on the next fruit product you buy.
My favorite episode so far. Seriously considering becoming a patron! Also everyone read Kate Raworth's book called: Doughtnut economics
Richard Thaler got the nobel prize for economics this year (2017) and he studies behavioral economics!
I read an article about the ultimatum game. Declining an offer makes sense if you play with someone you know because social agreement is a recourse that people value.
Predictably Irrational by Dan Ariely is a great book covering this, among other topics.
This is amazing I was just looking at the book Nudge yesterday. Love this topic. I'm an MBA student in Chicago and I'm beginning to realize I love Economics more and more. I wonder how this applies to the Armed Forces. I'm in the Army and this topic may be worth a closer look there. #DFTBA #Nudge #behavioraleconomics
Classical economics operates mostly on 'ceterus paribus', but as the world become more complex, more factors can't be ignored and multiple theories emerged into new understanding (Complexity Theory)
That AC/DC belt is eye catching.. and changes colours. This guy
Classical economic theory still holds true for most of the phenomenons explain in this video. Framing is the instance for which further deliberation from my end is needed.
Take for instance risks, and let us assume a utility function as follow:
f(x) = x*p ; where x = cash and p = probability
1. You can indeed take the 50/50 bet of obtaining either $100 or $0.
2. Otherwise, you can simply opt to receive $50.
The expected utility for both options is $50 as (easily) proven below.
f(100) = 100*.5 = 50
f(50) = 50*1 = 50
What this video tries to illustrate is that if you were instead given the choice between
{1. You can indeed take the 50/50 bet of obtaining either $100 or $0.
{2. Otherwise, you can simply opt to receive 50>n
and you decided to choose the second option, you are an irrational consumer because your expected utility would be less than 50.
BUT
Economics teaches us that individuals can obtain or lose utility from anything. In this case, we can adjust our initial equation by including the utility humans may get from certainty (indeed, this is implied, but reasonable nonetheless).
If we input such benefit someone may get into the equation, we can end up with an equation as such:
f(x) = x*p + 10*p
Note: the number 10 is hypothetical and should be determined on an individual basis.
The new equation depicts that this specific individual obtains more utility from certainty (aka more probability of getting money), and can gain up to 10 units of utility.
Under this new model that takes into account the utility a person gets from certainty, the rational decision is to choose the $50 payout.
f(50) = 50*1 + 10*1 = 60 > f(100) = 100*.5 = 50
Yet again, microeconomics is truly based on implications and the rationale behind it will never mirror the world we tread. Hope this provoked some thought and changed the way you perceive decision making.
WOOH LEARNING!
My fav video in these series so far.
Thanks for your knowledge and sacrifice.
Refusing the inegalitarian split of money is entirely rational. Far better to lose a buck than create the precedent of being easily exploited. Choices aren't usually made in a vacuum.
+Wiggum Esquilax You're assuming people would know about your decision, or that they would have to make it more than once. I think that if people were told that nobody would know about any of this and it would only be a one time thing, they would have made the same decisions, proving that they would rather not receive any money to make things fair than receive a small amount of money.
The game could change, however, if they thought that it would be a disadvantage for the other person to receive more money than they did, which can be the case in lots of scenarios, but not this one.
I took this video very seriously but on the more light side of things - am I the only one who thinks this guy really reminds of Marshall from How I Met Your Mother?
The 100$ gamble vs. 49$ certainty is actually perfectly rationnal when you take into account the law of diminishing returns that you mentionned earlier.
100$ might give me 6 utils, and 50$ might give me 4 utils. 50% chance to have 6 utils isn't as good as 4 utils.
Aaaaaaah Food and Drink Couple strike again! 2:55
My head cannon is this is more than stock footage and is actually some kind of inside joke.
He's wearing an AC/DC belt. I am in bro. I'll buy whatever you are selling.
Saying physics is the same because Newtonian laws don't hold up on a quantum level is really fucking stupid.
Nobody ever used Newtonian physics on quantum mechanics. because we know, and knew from the beginning it wouldn't held up.
+Ward Huyskes He was trying to give an example as best as possible. Since behavioral economics is a real subject most marketers use to their advantage, so far the laws of demand would have to hold up to be true - most of the time.
Reimu Hakurei no he tried to explain that the inaccuracy of laws is not unique to economics, in which he claimed that physics laws aren't always true. Which is just plainly wrong.
+Ward Huyskes It was just an analogy, obviously economics and physics are very different things.
+Ward Huyskes I think it was an excellent analogy. The Newtonian model is outdated and flawed, but it's still good enough to explain the behavior of the material world around you in many aspects. The Classic Economic model is outdated and flawed, but it's still good enough to explain the behavior of consumers in many aspects.
Quantum Physics and Behavioral economics are newer models, built on the old ones, that add several more layers of complexity in their respective fields.
Nobody ever used Newtonian physics on quantum mechanics because quantum mechanics are specifically explored to answer the questions that the Newtonian model couldn't answer. The same applies for economics. Criticizing this analogy and calling it stupid is really fucking arrogant, Mr. Cooper.
+Ward Huyskes Physical laws all involve assumptions and approximations, and physicists did indeed try to apply classical laws to quantum mechanics; see for example the "ultraviolet catastrophe" which led to Planck proposing quantization as a solution, and Dirac eventually applying relativistic mechanics to the electron. The "universal law of gravitation", which Newton had pointed out works on earth as it did in the heavens, won't work on smaller scales? Well, let's see, if we take a point mass...
You should have mentioned that people reacted very differently in the ultimatum game depending on cultural influences! Not only do economists have a gap of knowledge with behavior, they have a gap of knowledge of the behavior of anyone outside of North America.
Love it. It makes a complicated subject digestible to even the simplest minds. Yum pureed knowledge. I always wanted that kiddy register.
Taking behavioral economics this semester. Crash course makes it interesting and easy to understand !
I was distracted by that AC/DC belt buckle!!!
I'v watched all the episodes up to this point. I find the rivalry Jacob has with Physics hilarious
I would support the Raise Our Taxes act, taxes are currently too low, especially the top rate of tax
***** why shouldn't they have to give up a portion of their wealth? they have a lot of it, more than they could spend over a dozen lifetimes, and most of them lack the moral backbone to voluntarily give it
+Assassin55555 Clearly somebody didn't watch episode 21 of this series or they'd have been able to answer their own question.
+Field Marshal Fry I support the claim taxes are theft.
If getting a medical treatment cost $10,000, without proper taxation, you'll have to pay $10,000 all by yourself.
But with proper taxation, you'll actually pay less than $10,000 over your lifetime (with middle class wage) and get a free medical treatment multiple times. I think that's a good deal.
Just because a treatment cost $10,000 doesn't mean that you'll have to pay $10,000 in tax to make it free; that's because most of the tax burden will be from the upper classes.
Mickey G Plenty of taxes benefit everyone, infrastructure and education benefit everyone. If taxes didn't pay for healthcare then poor people couldn't afford it, and they'd all be sick.
And people that are sick aren't going to care about buying anything but necessities and saving every remaining dollar for medicine. Farmers are going to charge more for food because they need health care too, everyone is making less stuff and charging more, GDP collapses and a superpower country reverts to a third world country.
The best tasting food is the food you make your own, be it growing it, fermenting it, hunt it and prepare it.
So informative - My favourite episode yet.
Awesome episode.
The instinct for risk aversion makes sense. I'm doing OK right now. Winning more would be great but I don't know if I can afford to lose, so even if the wins would outweigh the losses long term, I can't guarantee that I can survive a loss. I think we evolved to have risk aversion. Those that risked didn't survive.
Love these guys
Curious, in the 3 groups bonus experiment, won't it have a negative impact on morale for the 3rd group? So while it might work out in the short term, I'd expect a higher quit rate for the third and perhaps degradation of performance over time.
Granted, I understand the point you are trying to make. But I'd rather not people see this and try to apply it only to be adversely affected later.
You guys are amazing. I love the way you two explain economics jargon. #GreetingsFromHolland
I should point out that people in different countries behave differently and that models and theories that discussed in this video may not always apply as easily as shown. A good example is the difference politically, culturally, and economically between the UK and USA.
The standard example for this topic used nowadays is the "rested XP bonus" in World of Warcraft, which gamer love! It was actually a "played for too long penalty" during the WoW beta and beta-tester hated it with passion. The game designers didn't change any number, just the name of the mechanic.
Oh my god I realized just now that the guy has his own channel
Can crash course create a new series : arabic history
Arabic history is so vast and interesting it should be covered, my opinion
Love the Chanel 😍
It makes sense logically if someone knows a bad deal wont be accepted then they will want to make a good deal as that is worth more than nothing. it is only irrational in the short term as sometimes people don't always realise a fair deal is necessary. To get any money
Love that AC/DC belt!
I love these videos! You guys really make learning so much more fun!
For good reading on the cafeteria food-choice results as well as other interesting factors that subconsciously influence what and how much we eat, I recommend works by Brian Wansink including Mindless Eating: Why We Eat More Than We Think.
Wow, behavior economics is saying we should stay dumb and rewarding dumb behavior.
ive not particularly liked the series, but this episode is good. i think its because there's less of the unnecessary funny antics that can get rather cringey. not to say its bad, but its just my opinion. keep up the good work!
That heads or tails example REALLY depends on how long you're going to be playing.
One fip? Probably not.
100? Let's go.
+Bigdawgphilleep Gamblers fallacy doesn't necessarily apply here, the chance of losing 100 times is so unlikely that is fair to assume you have an equal chance of winning/losing overall.
+Bigdawgphilleep
you not getting that expected value only counts due to law of large numbers.
Not much meaning of expected value in 1 flip.
+Bigdawgphilleep
Here's why it's much better to play as many times as possible:
1 flip:
-50% chance of losing $50
-50% chance of winning $100.
2 flips:
-25% chance of losing $100
-50% chance of winning $50
-25% chance of winning $200
3 flips:
-12.5% chance of losing $150
-37.5% chance of breaking even
-37.5% chance of winning $150
-12.5% chance of winning $300
4 flips:
-6.25% chance of losing $200
-25% chance of losing $50
-37.5% chance of winning $100
-25% chance of winning $200
-6.25% chance of winning $400
And so on...
Each time you flip the coin, you have the same changes of increasing your prize or decreasing, but because the increase is always bigger than the decrease (+$100 vs. -$50), you will end up winning money on average.
Most ice cream vendors are happy to let people try their product before buying
Really! Where's that! I want to taste ice cream!
In the words of the Stand-Up Economist, "People aren't rational. People are stupid."
Admittedly the context is different, but I posit that it's a pretty good explanation of why Behavioural Economics is important.
that AC/DC belt though :) thanks for good lecture
"Applied to" - Let's face it, the Hierarchy of Effects, already a part of Marketing, confronts this issue effectively and has been doing so since the 1950s.
Love the crash course history references.
Damn welcome to crash course Mr Clifford! :)
Mr Clifford what a legend
Great video
I'm currently doing my master's degree which relates to behavioral economics, and it would be awesome if you can provide us with the references you used to create the video
so we can read more about it :)
thank you. this was simply and clear.
Crash Course Econ is just the best
This video should be economics 101. Everything else is based off of this.
The policy implications of this are quite interesting (and ideologically charged). The extent to which you believe human irrationality undermines the idea of the market operating sustainably without interference will go towards determining how much regulation in the economy is felt appropriate.
(Although there are some people who think the free market is fundamentally flawed, but gov't intervention is just worse)
+Merry Machiavelli like all things its a mix of both. neither the market or government would benefit from the other falling.
Rose Erin Well no, but that wasn't really what I meant. Nobody really argues that the market would benefit from gov't failure or vice versa.
What is more disputed is the extent to which a free market can do just fine on its own.
At one extreme you have Neoliberal/liberarian thinkers who argue that essentially any intervention in the economy is negative - to the point of some disliking central banks themselves.
.
At the other end you have Keynesian and Regulation theorists who argue that the capitalist system is inherently self-destructive without the right social and economic policies in place.
Merry Machiavelli america doesnt know how to do subtle changes we believe in extremes and are always trying to counter the opposite extreme
Very useful, thanks
Bottom line as with my Industry Landscape Architecture and Urban Design, 'Its about people...stupid'. I spend so much time talking to clients about just people and their often irritational, emotion based ways, with all the present cognitive research we can actually improve the experience of the majority by small nudge changes, the classic being desire lines....
A really excellent video...this type of behavioral science needs to be at the centre of more industries to avoid a seemingly rational expectation to an often irrational end user.
This is a huge subject as we have the nature, nurture, environment, expected cultural rules, length of time for a decision, empath or sociopath and everything in between....
It's ultimately not about boxes, but evolution and a framework to be adapted as we evolve, messy sometimes for sure, but a lot less damaging than dictact's from above....
Bounded Rationally , Lack Of Information , Ultimatium Game , The Framing Effect , Risk , Risk Adverse ,
There are videos out there about the Mountain Man Wolverine hat. And they're... interesting.
So good thanks for the upload
Homeboy stole that belt buckle from Howard Wolowitz.
LOL! If I tell my employees that they have to pay back their bonuses if they fail to meet the goals, they would probably quit. Can I get them to sign something legally binding?
If you raise the price of a product and that make it sell more, that means you increase the demand of one sector of the population that wasn't interest before, meaning the law of supply and demand it's still a law.
This is very interesting, some things here could be embedded within product design
perceptions and passions influence our passions! it rhymes!
"passions influence our passions!"
That's cheating.
awesome lecture guys
You guys are amazing thank you !
You guys are my saviors 😢(crying of happiness)