New Cognitive Perspectives Introduction: Altruism and rationality

1. New Cognitive PerspectivesIntroduction: Altruism and rationality Based on Frank (1992, chapters 7-8) and “Rethinking Thinking”

2. Linking with previous discussion • Implicit assumptions in our analysis of the water scarcity case • Users • react to price (zero, high): rational utility maximizers • have a malleable utility function (preferences), which can be modified by, e .g., advertising, making them feeling guilty • Politicians • public interest • private interest—can it converge into public interest? How?

3. Human conduct: Using & Opening the “Black Box” • Economics • Self-interest • Rationality • Observable deviations from • Altruistic cooperation: love, tips by tourists • Failures of rationality: love? revenge • Two complex dimensions in conduct • Self-interested---------------Altruist • Rational-------------------Emotional

4. 1. Self-interest

5. A couple of simple questions • Does selfishness “pay”? • Example: Prisoners’ dilemma • Are there genuine altruists out there? • Do you know someone who finding a wallet with 100€ would return it to its owner? • Why do you trust this person? • How would she feel if she did not return the wallet? • Could they exist, compete, survive?

6. Basis for “altruism” (often, better to say “pro-social” behavior) • Commitment • Often, emotional automatic, not “rational”: “they suspend” rational calculation • Identification of types • by others (so that they trust us) • by oneself (to avoid to be deceived) • Examples: • Physiological: face expression, tone of voice, breathing, blush, visual contact, smiling, dilated pupils, etc., etc. • Social: how the Mafia does it?

7. Emotional commitment

8. Emotional commitment?

9. 2. Rationality

10. Two Views on “Bounded Rationality” • Costly to gather & process information needed to make optimal decisions we “satisfy” • E.g.: chess with clock: 40 plays in 2,5 hours • To satisfy = to optimize with information cost • Systematic “errors” = violations of the “rational” rules of decision: “Biases / Anomalies” 

11. Ex.: considering “sunk” costs • Firms keep investing in ruinous investments • Countries? AVE? Ourselves? • Famous experiments • New shoes, too tight: Do people react the same if they bought them as if they received them as a gift? • Pizza buffet: pay 3€ you eat all you want • We give back 3€ to lucky tables: Will these eat more or less that the other tables?

12. Bus. Econ: Prospect Theory (Asymmetric value function)- defined on changes of wealth - aversion to losses steeper for losses- decreasing marg. utility concave in gains, convex in losses

13. More “anomalies” • Availability • Representativeness • Anchoring • Perception • Irrelevant options * Are they errors only in an specific context? E.g., think of possible evolutionary explanations

14. Availability • We estimate frequency by our memory of cases: they affect decisions more the easier to remember (more recent, salient, etc.) • How many words begin or have "r" like 3rd letter? • How likely to die in a plane crash? • Dangerous when evaluating subordinates

15. Representativeness • A brilliant soccer player, is more likely to be Brazilian or not? • 10,000 players altogether, 100 of them brilliant • 50 players are Brazilian, 25 of them brilliant • We miss the “regression to the mean” • Ex., supporters complain that their team plays worst after a success when it is in fact falling back into its mean performance

16. Anchoring & adjustment • X = % of African countries in the UN • Lottery number (anchor) = n = 10 or 65 • People estimates different X: • If n = 10 E(X) = 25% • If n = 65 E(X) = 45% • To consider products • 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1  2,250 • 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8  512 • Can dating tips be derived from this? • More food for thought: • Are these experiments artful but irrelevant traps, to our “Bayesian” mind, designed to produce probabilities from unique events, not to handle frequencies, that require great samples?

17. Perception is proportional to the intensity of the initial stimulus • Luminosity • We did not perceive the small differences • We do not see difference between bulbs of 100 and 100.5 watt • But we see a 0.5 watt bulb • Price differences between stores: they influence more if they are important with respect to the price of the article • Does it explain transactions costs in real estate?

18. Price A C B Distance Irrelevant options (“decoy effect”) • When adding “dominated” option C (“irrelevant”), the proportion of people inclined to a near option (B)increases • Which dating tips can be derived from this?  • Food for thought: although C is dominated, • Is it truly irrelevant? • Could not it be informing that the next option is relatively better? (in similar, real, situations)

19. Still more “anomalies”Exercise: after reading “Rethinking Thinking,” provide examples from your daily life • excessive fear of feeling regret • cognitive dissonance • status quo bias • tendency to compartmentalize • over-confidence • magical thinking and quasi-magical thinking • hindsight bias and memory bias • Ex: judicial decisions see contract as unequal ex post • emotional responses

20. Examples of applications • Decoy effect in politics • http://www.washingtonpost.com/wp-dyn/content/article/2007/04/01/AR2007040100973.html • Decoy & anchoring effects in dating • http://livinglifewithoutanet.com/2010/07/23/dating-tips-decoy-and-anchor/

21. Are these biases errors only in an specific context? Next, we will examine an evolutionary explanation (Topic 1)