ASRJC Theme 1 Rationality in Decision-Making Lecture notes (Final) Printed

THEME 1: Rationality in Decision-Making Anderson Serangoon Junior College Economics Department A 1 THEME 1: RATIONALITY IN DECISION-MAKING CHAPTER 1: RATIONALITY AND BOUNDED RATIONALITY IN DECISION MAKING 1. THINKING SKILLS FOR H3 ECONOMICS 2. RATIONAL DECISION-MAKING, SHADOW PRICING AND DISCOUNTING 3. BOUNDED RATIONALITY A. LOSS AVERSION • ENDOWMENT EFFECT • SUNK COST FALLACY • STATUS QUO BIAS B. SALIENCE BIAS 4. BOUNDED WILL-POWER & BOUNDED SELF-INTEREST 5. APPLICATION OF THE USE OF BOUNDED RATIONALITY, BOUNDED WILL-POWER & BOUNDED SELF-INTEREST BY ECONOMIC AGENTS • NUDGE THEORY Anderson Serangoon Junior College JC2 H3 Economics 2025

THEME 1: Rationality in Decision-Making Anderson Serangoon Junior College Economics Department A 2 THEME 1: RATIONALITY IN DECISION-MAKING SYLLABUS CONTENT (H3)

THEME 1: Rationality in Decision-Making Anderson Serangoon Junior College Economics Department A 3 THINKING SKILLS FOR H3 ECONOMICS 1.1 Introduction In the study of H3 Economics, students often engage in independent research and would need to critically evaluate different references to develop an in-depth understanding of the topics. In a world where information is readily available for economic agents, an understanding of the pitfalls in the use of information is crucial for economic agents to refine their decision-making skills, to avoid making decisions that may seem irrational on hindsight. It is important for students of H3 Economics to develop an awareness of statistical limitations (misleading comparisons and selection bias), the plausibility of the ceteris paribus assumption and common logical fallacies (fallacy of composition, post hoc fallacy and conjunction fallacy) to critically evaluate the relevance and validity of information given; economic principles, concepts and theories; and perspectives and decisions made by economic agents. As students analyse information, here are some important questions that they should consider: • Economists frequently stress the assumption of ceteris paribus ʹ to what extent is this important and how feasible is this in the analysis of economic events? • What are some logical fallacies that economic agents can fall prey to? • What are some common pitfalls in the use of statistics? • How can economic agents take advantage of appropriate and careful use of information to enhance their decision-making? As they consider the questions listed above, it is also important for students of H3 Economics to consider and understand the nature and significance of Economics as a social science (as compared to the natural sciences) and the foundations of economic analysis (model, evidence and statistical anal 1.2 Plausibility of Assumptions Ceteris paribus assumption: In Economics we often assume ceteris paribus (all other factors remain constant)