Behavioural economics

HAPPINESS AND UTILITY

Content of preferences: what makes us happy? (how events have impact on happiness)

Do we know what makes us happy? (sophistication and rationality)

Answer important for 2 aspects: policy (forms of government interventions aimed at maximizing social welfare. (nudging) Business (for firms is important to know what consumers want).

TRAP: some biasesà we apply the term happiness for many things; being happy in life or with your life.

THERE ARE 2 SELVES: one experiencing who lives in the present and knows the present. It lives life continuously. Moments lived by experiencing self are lost forever, most of them ignored by remembering self.

And then the remembering selvesà the one that maintains the story of our lives, storyteller, our memory that tells the story.

Experiencing self and remembering self are 2 entitiesà making mess is part of the notion of happiness.

What defines a story by the remembering self: changes, significant moments, endings

(veryimportant). TIMEà critical variable between these 2 entities. Remembering self takes the decision of which event keep in mind. We CHOOSE BETWEEN MEMORIES OF EXPERIENCE.

How happy is the experiencing self? How happy are the moments in the experiencing self’s life? It’s about how happy or satisfied a person is when he thinks about his life. Who does not distinguish with the 2 entities mess up with the notion of happiness.

Money does not buy experiential happinessà in terms of remembering self the more money you earn, the most satisfied you are.

MEASURING HAPPINESSà through U-INDEX (how much time people spend in unpleasant things). Positive correlation U-INDEX and low income but not too strong. Things become different in international contextà people from Brazil declare themselves happier than people from richer countries: Japan, Australia.

What is important for people is relative income. (if level of income increases in relative terms, impact)à

1. reference point (average level of income in population) to express level of happiness.
2. There are some events that change our lives: lottery winners (if you win lottery today you tend to remember better the past), accident victims (tend to judge more happier) à IDEA OF LOSS AVERSION.
3. If we compare us before the pandemic and know we tend to judge ourselves happier before pandemic. Marriage, birth of first child, unemployment, disability.
4. ADAPTATION AND HABITUATION à happiness adapts to changing events:
   1. readjustment (following negative events people find happiness again);
   2. habituation: change in reference level with respect to negative or positive effect;
   3. contrast effect: valuate future events comparing present and future;
   4. aspiration treadmill: decision in future with consideration of present situation.
5. Anticipating future preferences: OVEROPTIMISTIC CONSUMERS
6. Preferences may be based on wrong predictions. Consumers may be too confident, overoptimistic in predicting their

1. PL=UH+ (VL-VH)
2. PH=UH

PH=UH and UH+ (VL-VH). With this contract both consumers prefer R.OPTIMAL FOR THE FIRM: reduce PH (as in standard menu pricing). The presence of rational consumers advantage overoptimistic reducing the price.

PRICING FOR BEHAVIOURAL CONSUMER: experiments: attendance to healthy club: Firm can offer 3 contracts: monthly (automatic renew monthly); annual contract; (per visit with a fee every visit). Flat rate contracts have intuition fee but no a per visit fee. Price for attendance: higher than price for visit.

Most users are overconfident: flat rate contract wrongly. Users are overoptimistic about their future attendance: systematic errors. FLAT-RATE BIAS.

Consumers are overoptimistic about cancellation, too. They procrastinate cancellation (delay of 2 months for automatic cancellation). Overoptimismà leads consumer to flat rate contracts and delay cancellation. Firms can profit from higher price and delay in cancellation.

FIRM CAN EXPLOIT OVEROPTIMISTIC CONSUMER BY 3 PART TARIFF

CONTRACT: Fixed component, price of 0 for a predetermined number of units, positive marginal price for additional units beyond the allowance.

Rate of uncertainty and overoptimism. Consumers are too confident about their future behaviour.

BIAS IN CONSUMER BEHAVIOR. A monopolist obtains profit from the fix component and the price of units after the satiation point, when consumer signs contracts they do not care about price after satiation point because they are overoptimistic.