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Question 4. (7 marks)
The homo economicus view of man’s behaviour as applied to the bulk of
finance theory portrays decision makers and being both self-interested
and rational. Neoclassical economics makes some fundamental assumptions
1. People have rational preferences across possible outcomes or states of nature.
2. People maximize utility and firms maximize profits.
3. People make independent decisions based on all relevant information.
In light of the following hypothetical experiments, discuss the above
Ten people are in Room X (givers) with a further ten people in Room Y
(takers). Each giver in Room X will be paired with a taker in Room Y
although they will not know the identity of the other. Givers have been
given $20 and can transfer any part of their $20 to a taker in Room Y.
Takers can either choose to keep the amount sent, in which case the
amount proposed is final or else reject the amount sent, in which case
both individuals receive nothing. That is, you can send any dollar
amount from $0 to $20 and the taker can accept this offer, or reject it,
in which case you both receive nothing. For example, If the taker
accepts and you send $10, you keep $20 – $10.
You are a giver. How much do you give?