ECO208 Name: Samara Chaudhury

Summer 2016
Quiz 5 (Take-home) Student ID: 15305022
03/08/2015
Deadline: Wednesday, August 3 by 10:00 PM

Ans 1) A and B is a positive framing comparison which lists the number of people that will live
and in this case most people, including myself, would choose A over B. C and D is an example of
negative framing, in this case the better decision would appear to be D over C.It is interesting to
note that the outcomes in A-C and B-D are exactly the same. This obvious difference in
decision-making arises from the fact that framing the question positively(in terms of lives
saved) makes a treatment more attractive than framing the choice negatively(in terms of lives
lost).

Traditional economic theory or in the basic model of consumer theory- the choices were in the
abstract; as in its either case A or case B, black marker or blue marker, coffee or tea and so on.
However, the disease dilemma disproves this or rather shows that it is not as simple as that. It
shows that people are strongly affected by how choices are presented to them or framed. This
framing would even make expert decision-makers fall into a similar trap. When psychologists
tried this question on a group of physicians, 72 percent of them chose the safe treatment A
over the risky treatment B. But when the question was framed negatively, only 22 percent
chose the risky treatment while 72 percent chose the safe treatment. It goes on to reinforce the
disparity (as earlier explained) between the theory and empirical observations.

Ans 2) This approach will not be successful at all. It will, in actuality, encourage the opposite to
take place more frequently- meaning that the number of late pickups will promptly go up.
Parents would prefer to simply pay the extra amount.

Economists, fundamentally, is the study of incentives; how people get what they want,or need,
especially when other people want or require the same thing. Economists love incentives as it
will serve as the means to changing a situation.

Going back to the case in hand, after the fine was enacted, the incentive plainly backfired when
it was supposed to act as a way of discouraging and reducing pickup tardiness. Clearly, there is
something wrong about this incentive., Firstly, this can backfire due to the size of the fine. If it is
$3 then for such a price, a parent with one child could afford to be late everyday and only pay
$60 each month- this wouldnt even add up to being half of the base fee. This is in all certainty
cheap enough. However, decision-making would have been drastically different if the fine had
been set at $100 instead of $3. That would have likely put an end to the late pickups, though it
would have also engendered plenty of ill will. (Any incentive is inherently a trade-off; the trick is
to balance the extremes.)

There is yet another important issue with the daycare center fine. It substituted an economic
incentive (the $3 penalty) for a moral incentive (the guilt that parents were supposed to feel
when they came late). For just a few dollars each day, parents could buy off their guilt.
Furthermore, the small size of the fine sent a signal to the parents that late pickups werent
such a big problem. If the day-care center suffers only $3 (case of extrinsic motivation)worth of
pain for each late pickup,then the overall cheapened effect would not encourage parents to
change their behavior.

As previously discussed, economics is all about incentives. For example, if a child performs well
in classes on a regular basis then her parents will decide to reward her with a playstation. So
theoretically, the fine acting as an extrinsic motivation was supposed to work in afvor of the
daycare center employees and discourage parents from being late too frequently. They
expected the extrinsic motivation to compliment parents intrinsic motivation and in
conclusion, it should absolutely achieve the desired results. Since economics has reinforced the
idea that we all learn to respond to incentives, negative and positive, from the outset of life,
the daycare centers approach should have worked. At the end of the day, an incentive is simply
a good thing and less of a bad thing. However, empirical evidence shows how ineffective this
approach is for the reasons stated above. This daycare center tardiness penalty approach was
actually tested by some economists in Israel. They took a test sample of ten daycare centers
and this overall experiment went on for twenty weeks but the fine was not introduced
immediately. The fine was put into action in the fifth week and as observed, the approach did
not work at all. When the economists eliminated the $3 fine in the seventeenth week of their
study, the number of late-arriving parents didnt change. Now they could arrive late, pay no
fine, and feel no guilt.

This just prove that incentive is a powerful tool where a slight tweak can produce drastic and
often unforeseen results in reality.