Combining loss aversion with the standard economic model.

Abstract

When I followed the micro economic courses in my first and second years of my study, I was fascinated by the explanatory power on behavior many of these micro models seemed to have. My first feeling was that it was all very interesting, however when I passed these courses, a feeling started to grow on me that I would not be able to shake off, a feeling that these mathematical models would never really capture an actual decision making progress. When I observed the actions and decisions of others and myself, I observed so much irrational behavior that I actually started to wonder why I spend so much time studying theory that was not applicable. Of course my micro teachers did not sell me some fairy tell that these models did not have limitations. However, the fact that a bachelor student spends months of their time studying these models and spends hundreds of euro‟s on mathematical micro economic books should in my opinion mean that we actually get taught practical valuable methods. The behavioral economic courses where the first courses that actually introduced principles that really covered the human psyche and really formed the already present ideas in my mind. But instead of building forth on micro economy, the theory was based on experiments and formed its own theory. I started to recognize patterns of loss aversion and status quo bias in many, many elements of day-to-day life and confronted many micro economists that their theoretical work and conclusions missed these elements. In this thesis I want to take the basic micro economic model and improve them with one or more behavioral economic ideas. I spoke to micro economists and their opinion on behavioral economic bothered me. I want to counter the micro economists arguments against the behavioral economic field by showing the importance what can be done by a merging of the two field, and to convince people that behavioral and micro economics should not be different fields but behavioral economics should be the layer on top of micro economics to complete it. I want to help build the layer that actually brings the micro economic field to the next level and deals with the many irrationalities human decision making has. Even if I do not succeed merging the models, I want to at least show the problems I faced and most importantly inspire other people to expand the behavioral economic field. After writing this thesis, I realize now that it is much harder to combine the models than I thought it would be. I faced a lot of problems, and I want to thank my coordinator, dr. Baillon, for helping me through the progress. Although it was sometimes hard, I did learn a great deal about behavioral economic models. Enjoy reading. Daan Gouka

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