Lecture 2: History of Economic Psychology

Question 1

normative theories of decision making

Answer 1

describe ideal decision-making based on logic and rationality, focusing on how people should make decisions to maximize outcomes

Question 2

prescriptive theories of decision making

Answer 2

provide practical guidance or strategies to help people make better decisions, acknowledging real-world constraints and cognitive limitations

Question 3

descriptive theories of decision making

Answer 3

explain how people actually make decisions, focusing on real-world behaviors, biases, and cognitive processes, often deviating from rational or optimal choices

Question 4

counterproductive rewards

Answer 4

rewards may be counterproductive
- cobra effect
- robotic babies to reduce teenage pregnancies

Question 5

Adam Smith

Answer 5

father of modern economics
- rational economic man
- self-interest = good (“benevolence of the butcher”)
- the invisible hand
- moral sentiments
- empathy-induced altruism

Question 6

the invisible hand

Answer 6

the self-regulating nature of markets where individuals pursuing their own self-interest unintentionally promote the overall good of society through efficient resource allocation

Question 7

moral sentiments

Answer 7

moral emotions build society
- shame, guilt, regret, remorse, etc.

Question 8

empathy-induced altruism

Answer 8

the idea that humans are naturally inclined to care for others due to their ability to empathize, leading to actions that benefit others out of genuine concern rather than self-interest

Question 9

Blaise Pascal

Answer 9

expected value
- EV = p * x

Question 10

St. Petersburg Paradox and Utility

Answer 10

a situation where a naïve decision criterion that takes only the expected value into account predicts a course of actions that presumably no actual person would be willing to take
- Daniel and Nicolas I Bernoulli

Question 11

Jeremy Bentham

Answer 11

one of the first utilitarian thinkers
- “how should we organize society in a way to make most people happy”
- “in order to maximize, we need to be able to quantify and compare the amount of happiness/pleasure of possible acts

Question 12

hedons and dolors

Answer 12

units of pleasure and units of pain
- decision making = ‘hedonic calculus’

Question 13

John Stuart Mill

Answer 13

utility, or the greatest happiness principle

Question 14

greatest happiness principle

Answer 14

actions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness

Question 15

Carl Menger

Answer 15

founder of the Austrian School of Economics
- ‘Grundsätze’
- utility and hierarchy of motives (similar to Maslov but more complex and accurate)

Question 16

John Maurice Clark

Answer 16

economic and modern psychology
- cannot ignore human behavior when studying economics

Question 17

economics vs psychology

Answer 17

• mathematical vs experimental
• assumptions about behavior vs research about behavior
• aggregated behavior vs individual behavior
• normative theory vs descriptive theory
• deductive vs inductive
• deviations from theory (anomalies) vs separate theories for anomalies

Question 18

George Katona

Answer 18

founder of the survey research center at the University of Michigan
- index of consumer sentiment

Question 19

index of consumer sentiment

Answer 19

measures consumer confidence by assessing people’s attitudes toward their current financial situation, future economic expectations, and overall willingness to spend, reflecting their optimism or pessimism about the economy

Question 20

Herbert Simon

Answer 20

• bounded rationality
• satisficing
• study of cognitive processes leading to decisions

Question 21

Daniel Kahneman

Answer 21

• heuristics and biases in judgement
• prospect theory
• risk aversion for losses

Question 22

Richard H. Thaler

Answer 22

• mental accounting
• behavioral finance
• fairness
• self-control

Question 23

assumptions of economic theory

Answer 23

• stable preferences (over time and over situations)
• self-interest
• maximization (= greed)
• no cognitive limitations
• unlimited will-power
• complete information (market transparency)
• long time perspective (no role for emotion, no role for fairness)

Question 24

rationality

Answer 24

when people decide what to do, they look at what it gives them and how likely it is that they get it
- expected value

Question 25

availability heuristic

Answer 25

a mental shortcut where people estimate the likelihood of an event based on how easily examples come to mind, often leading to biased judgments influenced by recent or vivid experiences

Question 26

cognitive heuristics

Answer 26

cognitive shortcuts or rules of thumb to arrive at probability or frequency estimates

Question 27

representativeness heuristic

Answer 27

a mental shortcut where people judge the probability of an event based on how similar it is to a prototype or stereotype, often ignoring statistical realities

Question 28

base rate fallcy

Answer 28

occurs when people neglect general statistical information (base rates) in favor of specific, anecdotal, or vivid information when making judgements or decisions

Question 29

systematic errors of rationality

Answer 29

• biased probability estimations
• biased value estimations