Friday, April 4, 2008

Mostly Behavioral Economics

The value of a coin or banknote depends on its familiarity;
To check this result was not caused by some prejudice in favour of paper money and against coinage, Dr Alter and Dr Oppenheimer repeated the experiment offering either two single dollar bills or a single two-dollar bill. Like dollar coins, two-dollar bills are rarely found in circulation. The second set of results was virtually the same as the first. And when the study was conducted a third time with a real dollar bill and a subtly doctored version that had had, among other things, George Washington's head reversed, the results were, again, nearly the same. People, it seems, literally value familiarity.

Whether this observation has wider significance is unclear, but it may. Familiarity takes time to build up. It may have been unfamiliarity with the currency itself, rather than with its face value, which caused price gouging (or, at least, allegations of price gouging) when the euro was introduced. With that in mind, it might be wise for America's Federal Reserve to watch retail prices carefully when it introduces a new series of banknotes in August. With money, it seems, it is not familiarity, but unfamiliarity that breeds contempt.

To Act, or Not to Act: That Is the Question;
According to Ofer H. Azar, a lecturer in the School of Management at Ben-Gurion University of the Negev in Israel, inaction may often be a prudent choice in situations where most of us feel compelled to do something.

Mr. Azar studied high-stakes decision-making—not in the boardroom, but on the soccer field, where he collected data on the attempts of professional goalies to block penalty kicks. Regularly faced with huge incentives to block penalty kicks, goalies offer a great proxy for people who routinely make quick, high-pressure decisions. Mr. Azar hoped to see just how rationally people respond to such situations. Surprisingly, he found that goalies facing penalty kicks tended to let their emotions dictate their actions—often leading to detrimental outcomes.

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