Behavioral Economics & Finance: Business & Marketing Essay

Behavioral Economics & Finance
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Behavioral Economics & Finance
Question 1
* Authors distinction between decision utility and experienced utility
The two authors' analysis began by distinguishing the two forms of utility. Decision utility is also known as "wantability." It is derived from choices and used to explain choices. It is influenced by other factors such as past experiences, predictions, and beliefs about how useful utilities are and behave in the future (Kahneman et al., 2006). On the other hand, experienced utility refers to a pleasant or unpleasant experience associated with an outcome. It is a state reached when a particular item has been attained successfully, which pertains to the hedonic effect and experience of the said outcome. However, other indications are required for decisions to be made. Therefore, it is the result of the decision process (Kahneman et al., 2006).
* Projection biases 
Projection bias is the individual's assumption that their preferences and tastes will not change over time. Short-term preferences resulting from hunger and weather conditions and long-term taste changes will lead to projection bias (Kahneman et al., 2006). It also affects choices in other areas such as gym attendance, housing and car markets, and medical decisions. Therefore, people tend to exaggerate the degree of their future tastes to be similar to current tastes (Thaler et al., 2015). For example, I was once heartbroken, and I underappreciated the addictiveness of alcohol. I started drinking to relieve my stress with a plan of quitting once the stress is over. When things went back to normal, I continued drinking because I was addicted.
* How projection bias relates to whether and how much people choose to save for retirement when they are young
Planning for retirement involves making decisions on significant savings and investment options. An Individual's life involves both consumption and savings behavior, which must be balanced well and sacrifices made to achieve retirement goals (Thaler et al., 2015). Many young people tend to make mistakes due to projection biases because they exaggerate their future to resemble the current ones, making poor investment decisions. They will consume more during early life, and as time passes by, they consume more and more and save less (Kahneman et al., 2006). This bias will also misguide them to buy durable goods, which may last but will not generate income to sustain them during retirement.
Young workers in employment may not save more because employers contribute to their retirement schemes hence insinuating that their contributions will sustain them in the future; therefore, they do not need to invest, save, or contribute more to retirement schemes.
D. Fundamental factor or factors that determine the experienced utility of any given good or scenario
Pleasant and unpleasant experiences
Past encounters are mos...