Review for Exam 2

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Roman Sheremeta, Ph.D.

Professor, Weatherhead School of Management

Case Western Reserve University

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Lecture 16: Exponential Discounting�

• What is intertemporal decision-making?
• Exponential discounted utility
• What are the axioms required for preferences to be represented by an exponential discounted utility function?
• What are the properties of the exponential discounting model?

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Lecture 17: Hyperbolic Discounting (Model)�

• Hyperbolic discounting utility
• What are the axioms required for preferences to be represented by a hyperbolic discounted utility function?
• What is the difference between naïve and sophisticated decision makers?
• What is a commitment device and who is the most likely to use it?

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Lecture 18: Hyperbolic Discounting (Application)�

• Why people don’t save?
• How does “Save More Tomorrow” work?
• Why do people buy monthly membership to the gym, while pay per visit would be more cost efficient?
• What deadlines are the most effective at dealing with present bias and procrastination?

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Lecture 19: Hyperbolic Discounting (Solving Problems)�

• Estimate 𝛽, δ
• Calculate the optimal plan of action for a naïve and sophisticated decision maker
• Solve a two period model of utility maximization

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Lecture 21: Behavioral Game Theory�

• What are the essential elements of a game?
• What is a dominated strategy?
• How to solve the game using IEDS?
• How to solve the game using SPNE?
• What are the limitations of IEDS and SPNE?

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Lecture 22: Level-k (Model)�

• Level-k model
• How to solve the game using level-k thinking?
• What are the limitations of level-k model?

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Lecture 23: Level-k (Application)�

• Why people overbid in auctions?
• Why studios choose to cold-open their movies?
• Why investors follow recommendations of biased financial advisers?

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