Looking into Homo Economicus - Psychology in Economic Research

1. Looking into Homo Economicus - Psychology in Economic Research Ye-Rong Du Experimental Economics Laboratory AI-ECON Research Center Department of Economics National Chengchi University 歐陽勛系列講座

2. References • Earl, P. E. (2005) Economics and psychology in the twenty-first century, Cambridge Journal of Economics, 29, 909-926. • Earl, P. E. (1990)Economics and psychology: A survey, Economic Journal, 100, 718-755. • Della Vigna, S. (2008) Psychology and Economics: Evidence from the field, Journal of Economic Literature, forthcoming. Stefano Della Vigna Peter E. Earl 歐陽勛系列講座

3. outline • Economics and Psychology: development and relationship • Bounded Rationality: barriers to optimization • Motivation and Human action • Psychology in economics research • Concluding remarks 歐陽勛系列講座

4. Indicators of rosy future? • 2 Laureate: Herbert Simon (in 1978) and Daniel Kahneman (in 1992). Both work at the interface between the two fields. • Interest in psychological aspects of choice since Adam Smith. • The publication of survey articles and collections of reprints of significant articles. 歐陽勛系列講座

5. Indicators of rosy future? • A well-established academic group: IAREP • An academic journal: Journal of Economic Psychology since 1981. • The economic journal that welcome papers with psychological underpinnings: The Journal of Economic Behavior Organizationand The Journal of Socio-Economics. 歐陽勛系列講座

6. Partnership or Imperialism? • Economic psychology • Gary Becker • Topics: psychology. Ex: suicide, addiction • Approaches: economics. Ex: Constrained optimization or game theory. • Psychological economics • Topic: economics. • Approaches:psychology. 歐陽勛系列講座

7. Gary Becker • 假設個人會追求效用的極大化 (maximize utility)，而偏好在任一時點除了與消費的財貨與勞務相關聯外，也深受過去經驗(past experience)和社會力量 (social force)的影響。 • 「擴展此一效用極大化方法以包括內生偏好，能夠極為成功地整合相當廣泛的行為分析。我不認為有任何其他替代的方法，不論是根據『文化的』、『生物的』或者『心理的』力量，可以提供相對等的洞察力與解釋能力。」 歐陽勛系列講座

8. Lewis Petrinovich (1979) Mental process response stimulus uncertainty 歐陽勛系列講座 Modified version of Brunswik’s (1952) lens model

9. Barriers to optimization • Uncertaintyand risk: what do people perceive? • Problem of infinite regress • Duhem-Quine problem • Optimization under uncertainty? 歐陽勛系列講座

10. Barriers to optimization • Research on cognitive processes complements this logical argument for portraying choice not as involving optimization but, rather, as a 'satisfying' activity involving the setting of aspirational targets and use of simple procedures for forming judgements (Simon, I959). 歐陽勛系列講座

11. Barriers to optimization • Why simple? • Psychological limitation: • Miller (1956), 5-9 bits per second • Attention: routine situational reviews and problems have arisen. 歐陽勛系列講座

12. Anomalies • Psychologists and psychologically-oriented economists have discovered that decision-makers behave in ways that systematically violatethe Von Neumann/Morgenestern axioms of rationality. 歐陽勛系列講座

13. Anomalies • Reference point effect • Sunk cost effect • Endowment effect • Framing effects • Availability bias • Representativeness bias • Opportunity cost effect • Certainty effect 歐陽勛系列講座

14. Reactions • Psychology • Kahneman and Tversky:Prospect Theory • Economics • Preferences • Beliefs • Decision making 歐陽勛系列講座

15. Standard consumer behavior 歐陽勛系列講座

16. Standard consumer behavior • In the theory of consumer we will derive demand functions by considering a model of utility-maximizing behavior coupled with a description of underlying economic constraints. (Hal R. Varian, Microeconomic Analysis) • However, besides price and quantity of demand, all other things are basically unobservable (just in the past). • Economists build up lots of assumptions and axioms for this black box. 歐陽勛系列講座

17. Non-standard Preference 歐陽勛系列講座

18. Non-standard time preference • Psychology: Self Control Problems • Reality: discounting is steeper in the immediate future than in the further future. • Laboratory evidence: • ＄15 now ～ ＄20 in one month (345% annual discount rate) • ＄15 now ～ ＄100 in ten years (19% annual discount rate) 歐陽勛系列講座

19. Non-standard time preference • Field evidence: Homework and Deadlines, Credit Card Take-up, Life-Cycle Savings, Default Effects in 401(k)s, Welfare etc. • Neural evidence: McClure et al. 2004 Separate Neural Systems Value Immediate and Delayed Monetary Rewards. Science, 306. 歐陽勛系列講座

20. Non-standard time preference • Model: Laibson (1997) hyperbolic preferences 歐陽勛系列講座

21. Social preference • Laboratory evidence • Dictator game • Gift Exchange game 歐陽勛系列講座

22. Social preference • Model: Charness and Rabin (2002) • x1 refers to own payoff while x2 refers to other-player’s payoff. • They assume ρ > σ, which means player 1 cares more about player 2 when he is better than player 2. 歐陽勛系列講座

23. Non-standard Beliefs 歐陽勛系列講座

24. Non-standard Decision Making 歐陽勛系列講座

25. Feasible Feasible Non-standard Decision Making Emotion Menu Effects/ heuristics Limited attention Persuasion/ Social pressure 歐陽勛系列講座

26. Non-standard Decision Making • Limited attention, menu effects, persuasion/ social pressure and emotion are similar in that the resulting behaviors deviate from global optimal choices even given the standard utility and belief. • The next question is, do we really need preferences /utility or maximum principle to make decisions? 歐陽勛系列講座

27. Motivation and Human Action • Satisfaction is purely a function of how well things match up to expectations. (Instead of utility maximization or the plethora of theories of motivation proposed by psychology) • Subsequent verdicts on choices will depend on how expectations are revised in the light of personal experience and social interaction. 歐陽勛系列講座

28. Personal construct theory • Kelly (1955) • He argued that instead of seeing human action as “motivated” by, say, sex-drives or imprinted tendencies, it may be useful to see people as ifthey are intent on trying to predict and control events. • PCT sees people as forming ‘templets’ in their minds and then testing to see how they fit reality. 歐陽勛系列講座

29. Personal construct theory • Explanations • Consumer behavior: it seems appropriate to construe the things people buy as if they are means to the ends of prediction and control. • Emotions: For example, all of potential choices may provoke anxiety, in the sense that the decision-makers feel an awareness that the choices are likely to involve events that they are poorly able to predict and control. 歐陽勛系列講座

30. Cognitive dissonance theory • Festinger (1957) • He saw dissonance as a motivating factor in its own right. • The existence of dissonance will motivate the person to try to reduce the dissonance. • In addition, the person will actively avoid situations and information which would likely increase the dissonance. 歐陽勛系列講座

31. Psychology in Economics • The Psychology of the firm • Welfare and public sector economics • Psychological foundations of macroeconomics 歐陽勛系列講座

32. The psychology of the firm • Entrepreneurship • Motivation in the workplace • Learning and corporate productivity 歐陽勛系列講座

33. Psychological foundations of macroeconomics • The determination of aggregate demand • Taxation and the incentive to work • Unemployment • Balance of payments problem • The pace of economic growth 歐陽勛系列講座

34. Concluding remarks 「一切經濟現象只有就各個行為人的選擇與計劃來分析。除此以外，再也無法做正確的解釋。」 夏道平《經濟學的最後基礎》譯序 歐陽勛系列講座

35. Entrepreneurship • Entrepreneurs have unusual personality. They feel they have something to prove! • McClelland (1961) • He hypothesized that a personality variable which he called n Ach (‘need for achievement’, which he defined as ‘the desire to do something better, faster, more efficiently, with less effort) is an essential component of a successful entrepreneurial personality. 歐陽勛系列講座

36. Welfare and Public Economics • The exploitation and protection of consumers • Cost benefit analysis • Fiscal psychology 歐陽勛系列講座

37. The determination of aggregate demand • Investment: • Keynes • “animal spirits” in the determination of aggregate investment • Use of simple decision rules as devices whereby choosers attempt to delude themselves into believing they know something about how the future will be. 歐陽勛系列講座

38. The pace of economic growth • Personality effect • McClelland hypothesized that n Ach varies across culture, so it cause different pace of economic growth between societies. • But it is criticized by Lea et al., 1987; Gilleard, 1989. 歐陽勛系列講座

39. The pace of economic growth Lynn R, Vanhanen T (2002) IQ and the Wealth of Nations, Praeger. • Intelligence effect • Lynn and Vanhanen (2002) and Lynn (2006) provided rich resources on the comparative studies of IQ among different countries and races, and indicated that IQ’s significance can even come to the social or country level. The significant contribution of IQ to economic growth has been further confirmed in other studies (Weede and Kampf 2002, Jones and Schneider 2006, Ram 2007). 歐陽勛系列講座