Lecture 2: history of economic psychology Flashcards
Psychological principles
- many choices are automatic
- people are social animals
- people respond to mental models
- people are hard to mobilize
- small changes can have big effects
Cobra effect
Brits wanted to reduce cobra’s in India so they gave a bounty for every cobra skin, but people startes making more cobras and skinning them to make money. So when the brits found out the cobra’s were released and they ended up with even more cobra’s.
rewards and punishments may be counterproductive
Gneezy and Rustichini, 2000
fines for picking up children late from daycare. Number of times people were late increased, because they now had an excuse for being late.
rewards and punishments may be counterproductive
why should you always test your intervention before using it?
because it can lead to different behavioral outcomes than expected;
- cobra effect
- daycare
- teenage moms (dolls)
Adam Smith
economy started with him when he wrote “wealth of nations” in 1776. before that he wrote moral sentiments.
wealth of nations 1776
Book about organization of society. Smith believed in rational economic man with self-interest and the invisible hand.
by Adam Smith
Moral sentiments 1759
says the opposite of what he later wrote in wealth of nations. talks about how it can make people happy to see others happy so they do things not for their own benefit, but for others (social utility). He proposes empathy-induced altruism
by Adam Smith
Blaise pascal
Mathematician (1623-1662), came up with expected value.
Expected value
EV = pX
St. Petersburg paradox and utility
about why people gamble. People accept risks based on the possible losses or gains and the utility.
gamble: throwing a coin and playing until you throw tails, heads doubles the money you win.
- how much money would you pay to play this game?
based on EV this amount should be infinite.
by Daniel and Nicolas Bernoulli
Jeremy Bentham (1748-1832)
wrote about organization of society, came up with the principle of hedonic calculus.
the sum of hedons and dolors would help us make a decision. in order to use this to maximize we should quantify and compare pleasure of possible acts.
hedons and dolors
- hedons = unit of pleasure
- Dolors = unit of pain
John Stuart Mill (1806-1873)
greatest happiness principle (utility) = actions are right if they proportionally promote happiness and wrong if they produce the opposite of pleasure
Carl menger (1840-1921)
founder of Austrian school of economics and developed a more complicated version of Maslows pyramid of hierarchy (before Maslow)
= hierarchy of motives
John Maurice Clark (1884-1963)
wrote two articles
- economics and modern psychology 1
- economics and modern psychology 2
about how the two principled influenced eachother and the point where they went different ways.
- economics became mathematical (f-twist)
- Psychology became experimental
George Katona (1901-1981)
indes of consumer sentiments; predictor of how the economy develops.
asks people if they plan to spend money on a big purchase in the upcoming weeks. individual choice determines what happens with the economy, because they add up.
consumentenvertrouwen vs consumentenuitgaven
prototypical economic psychologist
Ward Edwards (1927-2005)
brought economy and psychology back together after the diversion.
Herbert Simon
- bounded rationality: economy assumes rationality, but we know from psychology that people have limited cognitive capacity.
people are motivated to be rational within the limit of their cognition - satisfycing: people choose something that is “goof enough” but maybe not the best and will switch when something better comes along.
nobel prize winner in 1978
Daniel Kahneman
researched probabilities and risk judgement (how people decide p).
people use heuristics and biases for this.
nobel prize in 2002
Richard H. Thaler
- mental accounting: we have mental systems that keep track of our finances
- fairness doesn’t exist in economics, but it does in humans.
nobel prize in 2017
Assumptions of economic theory
- stable preferences
- self interest
- maximization (greed)
- no cognitive limitations
- unlimited will-power
- complete information (market transparancy and assymetrical information)
- long time perspective
Carmerer & Loewenstein
looking at the assumptions of economic theory and determining if they are true or not can give better insight for predictions and policy making.
People may not be rational, but they act rationally
economists’ arguments vs psychological rebuttals
there are many instances of irrational behavior
irrational agents will become extinct
economists’ arguments vs psychological rebuttals
if you don’t know your preferences incentives will influence you and every time this happens when someone sells you something there is a money pump
aggregate behavior is more rational (errors in rational behavior cancel out)
economists’ arguments vs psychological rebuttals
there are systematic deviations where people don’t act rational
ii
in the real world people will get it right (experiments differ from the real world)
economists’ arguments vs psychological rebuttals
systematic deviations and overconfidence (restaurant?)
If the stakes are high enough, people will get it right
economists’ arguments vs psychological rebuttals
small money decisions add up (and are relevant for everyday decisions)
rationality
when people decide what to do, they look at what it gives them and how likely they are to get it.
Where does rationality fail on the likelihood of gain side?
- biased propability estimates = people can’t estimate p
- availability heuristics = how often instances come to mind (terrorist attacks versus drowning news coverage)
- cognitive heuristics = rules of thumb for a probability or frequence estimate
- representativeness heuristics and the base-rate fallacy = philosophy students
Where does rationality fail on the gain side
- salary: people like to go up in salary
- bronze winners are happier than silver
- people that win the lottery and people that become paraplegic after a car accident return to the same level of happines after time
