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Bounded rationality

Here is a list of questions we designed as a class to probe behavioral deviations from rationality:

  1. You have been buying tools from a locally owned hardware store for several years.  A chain department store opens up at a similar distance from your house with indistinguishable products for 75% of the prices.  Where would you buy your tools?
  2. An owner of a high end grocery store makes $25,000 a year, above the average salary of grocery store owners.  A man on Wall Street makes $50,000 a year, well under the average salary of Wall Street workers.  Which man do you think is happier?
  3. A grocery store owner experiences inflation of 5% and increases his employees wages by 2%.  Fair or unfair?
  4. A grocery store owner loses business for various reasons, and in turn cannot pay his rent.  He decreases his employee's wages by 3%.
  5. A country is in a financial crisis and decides to raise taxes in order to raise government revenue.  In protest, all farmers raise the prices of their goods and as a result food is more expensive and fewer people are willing to buy it.  Is this fair or unfair?
  6. Unskilled workers such as garbage men have work which requires them to exert more physical strength than office workers.  They also have to work longer hours and expose themselves to  lot of unsanitary conditions, but they are paid significantly less than someone working in an office, sitting and typing out memos.  Is this fair or unfair?
  7. Barney is a perfectly competent worker at Books Inc.  Unfortunately, his daughter is sick with leukemia, and her treatment is expensive.  Jake is also a perfectly competent worker and performs just as well and even a bit better than Barney, and even comes in 5 minutes early and leaves 30 minutes late.  Books Inc. goes through a restructuring and needs to lay off workers.  They decide to lay Barney off with no pay or compensation.  Is this fair or unfair?
  8. There are two pieces of art.  You like both equally.  Item 1 costs $2,000.  Item 2 costs $4,000 but you are offered a special 50% discount.  Which item would you choose?
  9. There are two pieces of art.  You like both equally.  Item 1 costs $2,000.  Item 2 costs $10,000 but you are offered a special 75% discount.  Which item would you choose?
  10. A business buys tickets to plays, concerts, sports games etc. and resells them at a higher price than the were originally sold at.  Is this fair or unfair?
  11. When a book is first released it is sold only in hardcover for a higher price than it will be sold for in paperback in the future.  Is this fair or unfair?
  12. A small health insurance company insures two people, one who the company knows frequently gets sick and injured, and one who they know does not. Then, because of reasons not the fault of the company, they need to stop insuring one person.  They choose to insure only the healthier person.   Is this fair?
  13. In the same setting as the previous question, if they're forced to stop insuring one person for a reason that is their fault, do you change your answer?
  14. Would you accept a lottery which offers a 20% chance of gaining a house 10 times nicer than your current house and an 80% chance of losing your current house?
  15. A Wall Street employee who makes $100,000 a year receives a $20,000 pay cut due to the recession.  A McDonald's employee who makes $40,000 a year gets a $3,000 pay cut due to the recession.  Which is more fair?
  16. Consider two families, both Yankees fans.  The first has a net worth of $1 million dollars and buys box seats worth $30,000.  The second has a net worth of $90,000 and buys seats worth $3,000.  Which family is happier?

Feel free to answer these questions and email your answers to ttheodosopoulos@saintannsny.org.  We will report the statistical analysis of the answers as they accumulate.

Here is a tally of  the responses to some of the questions above so far:

    1. 4: local store, 3: chain store.
    2. 6: grocery store owner.
    3. 3: acceptable.
    4. 2: completely fair, 1: acceptable.
    5. 3: acceptable, 2: unfair, 1: very unfair.
    6. 3: acceptable, 2: unfair, 1: completely fair, 1: very unfair.
    7. 4: acceptable, 3: unfair.
    8. 3: item 2.
    9. 2: item 1, 1: item 2.
    10. 3: completely fair, 3: acceptable.
    11. 5: completely fair, 1: unfair.
    12. 2: acceptable, 1: unfair.
    13. 2: unfair, 1: very unfair, 1: acceptable.
    14. 6: No.
    15. 4: Wall Street, 3: McDonald's.
    16. 4: first, 2: second.


Here is a list of more questions that probe limited rationality and systematic behavioral biases:

    17. A New York city cab driver is compensated in two ways: either she is payed in cash at the moment it's due, or the customer uses his credit/debit 
         card to digitally pay the drive. If payed by a card, the cab driver wouldn't receive the accumulated digital compensation until the end of the month.  
         Which method would the driver prefer?
    18. Sam and Carl have a lunch budget of $20.  Sam goes to the local store and pays $10 for a sandwich.  Carl goes to the chain supermarket and 
         buys enough sandwich material for three sandwiches, paying only $6.  Which student is happiest?
    19. Jill's parents offer her two allowance options: a) $8 each day of the week, or b) $100 every second Sunday.  Which would Jill choose?
    20. How much happier do you think New Yorkers are compared to Alaskans?  a) Much happier, b) Somewhat happier, c) Less happy, d) Much less 
         happy.
    21. How much happier do you think New Yorkers are compared to Alaskans, if NY median household income is $54,400 and AK median household 
         income is $66,000?  a) Much happier, b) Somewhat happier, c) Less happy, d) Much less happy.
    22. A company with a very high stock value makes some risky and unwise decisions.  These decisions cause the company to be forced to declare 
         bankruptcy.  Their investors all lose money.  When the company gets back on its feet with the help of a government bailout, the executives who 
         were in charge before the bailout and helped make the risky decisions keep their jobs and receive no disciplinary action.  Is this a) completely fair, 
         b) acceptable, c)unfair, or d) very unfair?
    23. A developer offers you $500 to rent a piece of your land, deforest it, and build on it.  You would receive 10% of the profits from everything build on 
         the land.  Alternatively, an environmental activist group offer to re-forest your land for $750.  Which deal would you take?
    24. A developer offers you $500 to rent a piece of your land, deforest it, and build on it.  You would receive 10% of the profits from everything build on 
         the land.  Alternatively, an environmental activist group offer to re-forest your land for $500.  Which deal would you take?
    25. A developer offers you $500 to rent a piece of your land, deforest it, and build on it.  You would receive 10% of the profits from everything build on 
         the land.  Alternatively, an environmental activist group offer to re-forest your land for $250.  Which deal would you take?
    26. A developer offers you $500 to rent a piece of your land, deforest it, and build on it.  Alternatively, an environmental activist group offer to re-forest 
         your land for $750.  Which deal would you take?
    27. A developer offers you $500 to rent a piece of your land, deforest it, and build on it.  Alternatively, an environmental activist group offer to re-forest 
         your land for $500.  Which deal would you take?
    28. A developer offers you $500 to rent a piece of your land, deforest it, and build on it.  Alternatively, an environmental activist group offer to re-forest 
         your land for $250.  Which deal would you take?
    29. During a recession, Congress votes to increase taxes.  Congress institutes a progressive income tax, so that families making $30,000 must pay 
         an income tax rate of 15%, while families making $200,000 or more must pay an income tax rate of 45%.  Is this a) completely fair, b) acceptable, 
         c)unfair, or d) very unfair?
    30. During a recession, Congress votes to increase taxes.  Congress institutes a proportional income tax, so that everyone must pay an income tax 
         rate 25%.  Is this a) completely fair, b) acceptable, c)unfair, or d) very unfair? 
    31. Two companies, Company A and Company B, are facing difficult financial situations and need to cut back on spending. If not, they will be forced 
         to declare bankruptcy.  Company A meets this requirement by reducing the salaries of all employees by 10%.  Company B meets this requirement 
         by laying off 10% of their employees.  Which company's behavior is more fair? 
    32. You see a train with its brakes cut, hurtling towards five workers on a track.  You pull a level that shifts the train from the track with five workers 
         to a track with just one, killing that one worker.  Is this a) completely fair, b) acceptable, c)unfair, or d) very unfair? 
    33. Same scenario as in 32 above, but instead of pulling a level to change the train's direction, you throw a person underneath the train in order to 
         stop it.  Is this a) completely fair, b) acceptable, c)unfair, or d) very unfair? 
    34. You are a doctor working at a hospital when six people come in who were horribly injured in a dreadful train accident.  Five of them are wounded, 
         but not seriously so, while the sixth is severely injured and would require your undivided attention.  You decide to spend your time saving the five 
         patients letting the sixth one die.  Is this a) completely fair, b) acceptable, c)unfair, or d) very unfair? 
    35. You are a doctor who has five patients all of whom need a different vital organ desperately.  You decide to find a healthy patient, euthanize them, 
         and harvest their organs to save the five sick patients.  Is this a) completely fair, b) acceptable, c)unfair, or d) very unfair? 

Once again, feel free to answer these questions and email your answers to ttheodosopoulos@saintannsny.org.  We will continue to report the statistical analysis of the answers as they accumulate.

Here is a tally of  the responses to some of the second set of questions above so far:

    17. 12: cash, 0: card.
    18. 7: Sam, 6: Carl.
    19. 10: a, 0: b.
    20. 1: a, 3: b, 5: c, 1: d.
    25. 5: deforest, 8: re-forest.
    29: 2: completely fair, 6: acceptable, 1: unfair.
    30. 3: completely fair, 1: unfair, 5: very unfair.


Here is a list of questions we designed as a class to probe perceptions of risk and uncertainty:

Decision (1).  Choose between:

A.  a sure gain of $240.
B.  25% chance to gain $1000, and
      75% chance to gain nothing.

Decision (2).  Choose between:

C.  a sure loss of $750.
D.  75% chance to lose $1000, and
      25% chance to lose nothing.


Choose between:

E.  $150 plus one lottery ticket, that wins $500 with 
     probability 50%

F.  $150 plus two lottery tickets, each winning $250 
     with probability 50%

G.  $300 plus three lottery tickets, one that wins $500 
     with probability 50%, and two others, each winning 
     $250 with probability 50%



Choose between:

H.  $40 plus a gamble which loses $100 with probability 
   50% and wins $11 with probability 50%.

I. a gamble which loses $100 with probability 50% and 
   wins $180 with probability 50%

J.   a gamble which loses $100 with probability 30% and
     wins $110 with probability 70%



In evaluating the following choices, you may assume that CO2 emissions are directly proportional to global GDP.  Choose between the following three options:

K. If we continue emitting CO2 at the current rate, there 
      is a 70% chance that the economic costs of the 
      resulting seawater level rise by 2100 will surpass 
      30% of global GDP. 

L. If we reduce the rate of CO2 emissions by 30% over 
        the next 30 years, there is a 50% chance that the 
economic costs of the resulting seawater level rise by 
        2100 will surpass 40% of global GDP.

M. If we increase the rate of CO2 emissions by 50% over 
        the next 30 years, there is a 90% chance that the 
economic costs of the resulting seawater level rise by 
2100 will surpass 20% of global GDP.




Choose between:

N. Sell your best player for 120 Million Euros, risking backlash 
     from the fan base, and buying 8 new prospects who 
     are  unproven at the highest playing level. All of these
     players have a 5% chance of becoming as good as the best 
     player, and your star has a 60% chance of becoming the 
     most talented footballer in the world. 

O. Spend 30 million on a player that is 30% likely to be good 
     enough to bolster your squad and keep your star player, 
     throwing away the massive sum previously offered.


Choose between:

P. Risk 75% of your life savings to start your own restaurant.    
     You have a 25% chance of making 150% on your returns, a 
     25% chance of breaking even (getting your savings back), 
     and a 50% chance of failure (losing all/most of your money).

Q. Keep your life savings in a bank, with an interest rate of 2% 
     per year.


Do you want to:

R. gain $200 for certain, or 

S. $350 with a 60% chance?


Here are the results we obtained so far:

Decision 1
50% chose A and 50% chose B, when presented separately from Decision 2.

Decision 2
33% chose C and 67% chose D, when presented separately from Decision 1.

Decisions 1 and 2 together
0% A&C
50% A&D
12% B&C
38% B&D

Decision 3
100% chose G.

Decision 4
13% chose H, 27% chose I and 60% chose J.

Decision 5
21.5% chose K, 57% chose L and 21.5% chose M.

Decision 6
50% chose N and 50% chose O.

Decision 7
17% chose P and 83% chose Q.

Decision 8
100% chose R.


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