Study Guide Questions for the Nova Video Mind Over Money
Instructions. Read the introduction and questions below, and then watch the Mind Over
Money video (run time is slightly less than one hour). Next compose answers to the
three study guide questions below. Answers should be approximately one paragraph
per question – about one hand written page. DUE NEXT WEEK – JAN. 10TH AND 11TH
ALL THOUGHTFUL and WELL-DEVELOPED RESPONSES
WILL RECEIVE FULL CREDIT
Introduction. The video "Mind Over Money" explores two views of how individuals
behave, and how their individual behavior gets aggregated into market outcomes. The
first view is consistent with the main premises of market efficiency – that the prices of
stocks, bonds, real estate and other investments accurately reflect relevant information
because these prices are determined by the actions of people who are predominantly
rational. This view is supported by the "Rationalists," such as the University of Chicago
economists Cochrane, Becker and Fama. The other view comes from economists known
as "Behaviorists," explained by the psychologists and economists Lerner, Shiller and
Thaler. This view holds that while people may behave "as if" they were performing
analytical calculations when they are faced with simple problems, when problems
become more complex – such as whether or not to use adjustable‐rate mortgages to
buy a home, or whether to buy or sell certain stocks – people often make mistakes.
1.
Do you agree with the Rationalists' view that individual behavior regarding money
and wealth can be accurately described and predicted by mathematical models? Explain
your answer.
2.
Consider the experiments where a.) a $20 bill is auctioned off at a price higher
than $20; b.) people who have only owned a coffee mug for only one hour are willing to
sell the mug only if they can get a 50% markup; and c.) the price people are willing to
pay for a water bottle is significantly higher after watching a video intended to make
them feel sad. Are the results of these experiments consistent with the viewpoint of the
Rationalists (that humans' money decisions result from accurate calculations) or the
Behaviorists (that money decisions are heavily influenced by mood and emotion)?
Explain your answer.
3.
As pointed out by the video, a belief in market efficiency (that market prices are
always right) is usually associated with a belief that government regulation in markets is
undesirable, because regulation interferes with the market's ability to determine the
best economic price. Do you believe that governments should regulate financial market
behavior in ways such as a.) guiding consumers away from taking out mortgages they
can't afford, or b.) requiring easy‐to‐understand disclosure of all the fees charged by
mutual funds and banks, or do these (and other) types of regulation do more harm than
good for free‐market capitalism? Explain your answer.