Psychology and the Economy Flashcards
how are psychology and the economy linked?
psychology can contribute to the public good and a better economy
economic psychology is a blend of economics and psychology in that it seeks to gain an understanding of people’s behaviour in their economic lives
it also investigates the effects of social, cognitive and emotional factors on economic decisions and the rationality of such decisions
main features of economic psychology
irrational thinking; the availability heuristic and the framing effect
real world influences
irrational thinking
every human being thinks irrationally
Daniel Kahneman has researched and uncovered many examples of irrational thinking in everyday life….
- the availability heuristic
- the framing effect
the availability heuristic
an example of everyday irrational thinking
the availability heuristic is the rule that the likelihood of selecting something is related to its availability
for example, people tend to overestimate the likelihood of an incident occurring such as dying in a plane accident
the reason for such irrational thinking is because we often read about such accidents and therefore they are more available to us when making a probability judgement about the likelihood of being in a plane accident
the framing effect
another example of irrational thinking
the framing effect is when people’s decisions differ depending on whether a choice is presented as a gain or a loss
study for the framing effect
Tversky et al (1986) asked participants to choose between two treatments that were to be used with 600 people suffering from a deadly disease
group 1 was told that treatment A would result in 400 deaths but group 2 was told that treatment A would save 200 lives
group 1 was told that treatment B would have a 33% chance that no one would die and a 66% chance that all patients would die but group 2 was told that treatment B had a 33% chance of saving everyone and a 66% chance of saving no one
the participants were given the same facts about the success and failure rates of the treatment but the facts were framed differently
the facts presented to group 1 were framed negatively while the same facts presented to group 2 were framed positively — consequently, 72% of group 2 selected treatment A whereas only 22% of group 1 did
real world influences
understanding the systematic biases caused by such irrational thinking is important in improving our personal lives as well as wider society
Layard (2014) says that Kahneman’s work on irrational thinking has transformed business
his ideas have been applied to numerous situations such as decision making in juries, treatment of mental health problems, financial advice, government programmes, etc
applying psychology to improve the economy
social change
improving memory
attachment
mental health
biopsychology
social change
understanding social influence can be used to improve behaviour, which can positively affect the economy
for example attitudes to drink-driving and smoking can be changed by making people aware of social norms
if people are aware that the majority of their peers do not drink drive or smoke then they are less likely to participate in that behaviour themselves
reducing such behaviour can have positive effects on the economy — for example, by making people more healthy which reduces the strain on health care services
improving memory
research into memory has led to the development of the cognitive interview, a technique that has improved the amount of accurate information collected from eye witnesses
the positive implication on the economy is that we are now able to reduce expenses generated from wrongful arrests (e.g. the cost of housing people in prison, compensation, etc) and to ensure that criminals are caught (which reduces the damage they pose to the economy, whether it be through damage to property, fraud, etc)
attachment
bowlby’s theory of maternal deprivation and related research into attachment has developed our understanding of the importance of emotional care in early child development
UNICEF has indicated the continuing influence such research has had on developmental policies ensuring the healthy development of children
this positively impacts the economy because such healthy children are able to become productive members of society and thus improve the economy as more people will be working all over the world
mental health
the McCrone report (2008) estimated the direct costs of mental health in England at around £22.5 billion a year which includes spending in health and social care and the variety of other agencies
but there are also other costs concerning the impact on the criminal justice system and lost employment of people with mental health problems
this report said that “the number of people receiving medication provides a much greater economic gain than psychological therapies, which may produce similar benefits… but are far more expensive”
evidence-based research into effective drug therapy is important in reducing costs and helping people return to work
biopsychology
neuroscience offers the possibility of expanding our understanding of the human brain
an American government report suggested that this may have practical economic benefits in the area of smart machines which are machines that think like humans
these intelligent machines save a lot of money as they can carry out many tasks such as answering questions on the telephone or recognising faces at airports, which reduces the need for humans to be paid to carry out such tasks
