Typically, modern economics has steered away from the analysis of sociological and psychological factors and has focused on narrow behavioural assumptions in which expectations are formed on the basis of mathematical algorithms. Blending together ideas from the social and behavioural sciences, this paper argues that the behavioural approach adopted in most economic analysis, in its neglect of sociological and psychological forces and its simplistically dichotomous categorization of behaviour as either rational or not rational, is too narrow and stark. Behaviour may reflect an interaction of cognitive and emotional factors and this can be captured more effectively using an approach that focuses on the interplay of different decision-making systems. In understanding the mechanisms affecting economic and financial decision-making, an interdisciplinary approach is needed which incorporates ideas from a range of disciplines including sociology, economic psychology, evolutionary biology and neuroeconomics.
In six experiments we show that initial valuations of familiar products and simple hedonic experiences are strongly influenced by arbitrary “anchors” (sometimes derived from a person's social security number). Because subsequent valuations are also coherent with respect to salient differences in perceived quality or quantity of these products and experiences, the entire pattern of valuations can easily create an illusion of order, as if it is being generated by stable underlying preferences. The experiments show that this combination of coherent arbitrariness (1) cannot be interpreted as a rational response to information, (2) does not decrease as a result of experience with a good, (3) is not necessarily reduced by market forces, and (4) is not unique to cash prices. The results imply that demand curves estimated from market data need not reveal true consumer preferences, in any normatively significant sense of the term.
Recent findings indicate that macroeconomic survey forecasts are anchoring biased and therefore are inefficient. However, despite highly significant test coefficients a bias adjustment does not improve forecasts’ quality. We find that the cognitive bias is a statistical artifact and that the anchoring test is biased itself. In particular, it produces misleading results if macroeconomic analysts use more comprehensive information than assumed by the test. Our results have important implications for a wide range of empirical research relying on survey data to capture market participants’ expectations, for example, studies analyzing the impact of macroeconomic conditions on asset prices, equity risk premiums or market liquidity.
The need for more replication studies in psychology has been in the air for a few years now, particularly since Kahneman's priming letter. The publishing incentives in academia encourage novelty and finding new effects - driving forward at all times rather than squinting back at old papers and asking, say, whether doing a crossword can really make you walk more slowly down a hallway. As such not many individual researchers are willing to sink a few weeks or months into replicating a major paper - after all, either they will replicate the effect and won't particularly bolster their reputation or they won't find the effect and will then receive whatever plaudits are going for getting a null result (spoiler: there aren't any). There's no individual incentive to run replications*, but it's tremendously important for science in general to kick the tires of notable research papers to establish how sturdy they really are. In that sense it's a classictragedy of the commons situation where the incentives of the individual and the group are pulling in different directions.
The possibility that information can be acquired at a distance without the use of the ordinary senses, that is by “extrasensory perception” (ESP), is not easily accommodated by conventional neuroscientific assumptions or by traditional theories underlying our understanding of perception and cognition. The lack of theoretical support has marginalized the study of ESP, but experiments investigating these phenomena have been conducted since the mid-19th century, and the empirical database has been slowly accumulating. Today, using modern experimental methods and meta-analytical techniques, a persuasive case can be made that, neuroscience assumptions notwithstanding, ESP does exist. We justify this conclusion through discussion of one class of homogeneous experiments reported in 108 publications and conducted from 1974 through 2008 by laboratories around the world. Subsets of these data have been subjected to six meta-analyses, and each shows significantly positive effects. The overall results now provide unambiguous evidence for an independently repeatable ESP effect. This indicates that traditional cognitive and neuroscience models, which are largely based on classical physical concepts, are incomplete. We speculate that more comprehensive models will require new principles based on a more comprehensive physics. The current candidate is quantum mechanics.
Abstract: Experimental studies of the WTP-WTA gap avoid social trading by implementing an incentive compatible mechanism for each individual trader. We compare a traditional random price mechanism and a novel elicitation mechanism preserving social trading, without sacrificing mutual incentive compatibility. Furthermore, we focus on risky goods - binary monetary lotteries - for which asymmetries in evaluations are more robust with respect to experimental procedures. For both elicitation mechanisms, the usual asymmetry in evaluation by sellers and buyers is observed. An econometric estimation sheds new light on its causes: potential buyers are over-pessimistic and systematically underweight the probability of a good outcome.
Part 2 of the TED Radio Hour episode Memory Games. About Daniel Kahneman's TEDTalk Nobel laureate and founder of behavioral economics Daniel Kahneman.
Daniel Kahneman is an elder statesman in the field of behavioral economics. In the mid-1970s, with his collaborator Amos Tversky, he was among the first academics to pick apart exactly why we make "wrong" decisions.
Their work treated economics not as a perfect or self-correcting machine, but as a system prey to quirks of human perception. The field of behavioral economics was born. Kahneman was awarded the Nobel Memorial prize in 2002 for his work with Tversky, who died before the award was bestowed.
Since the release of 2008′s Nudge, behavioral economics (BE) has quietly invaded the public’s perception. Some of the most well-known examples include the creation of the Behavioral Insights Team in the UK, Cass Sunstein’s appointment in the Obama Administration, and the rise of popular economics books like Daniel Kahneman’s Thinking, Fast and Slow (and to a certain extentFreakonomics, which is not actually about BE).
This prominence has led to gut reactions, polarized opinions, and popular misconceptions. However ideas42’s Matt Darling and Saugato Datta, as well as ideas42 co-founder Sendhil Mullainathan, recently published an essay with the Center for Global Development to tackle this very topic.
They identify three common misconceptions, and delve into the nuances of each. The first, that“behavioral economics is about controlling behavior:”
Some people are worried that behavioral economics will be used, whether by corporations or the government, to control behavior. …What distinguishes the behavioral toolset, however, is that so many of the tools are about helping people to avoid making a decision that they themselves would consider a mistake. Elderly Americans who enroll in Medicaid Part D private drug plans are asked to choose from over 40 options. An intervention that reduced this overload – sending enrollees a letter with information about three alternative plans that would be cheaper for them — nearly doubled the proportion of enrollees who decided to switch plans… and saved $150 per year on average for each person who switched.
Recent models of unethical behavior have begun to examine the combination of characteristics of individuals, issues, and organizations. We extend this examination by addressing a largely ignored perspective that focuses on the relationships among actors. Drawing on social network analysis, we generate propositions concerning types of relationships (strength, multiplexity, asymmetry, and status) and the structure of relationships (structural holes, centrality, and density). We also consider the combination of the type and structure of relationships and how this embeddedness perspective relates to social contagion and conspiracies.
I’d like to write about the implications of living longer for retirement planning and the role that behavioral biases play in the difficulty people have in planning for their retirement years. My research interests are in how people think about the future, especially when they are planning for the future, and how thinking about the future is different than thinking about the present. My research supports what the physicist Niels Bohr (and many others) reportedly said, “predictions are difficult, especially about the future”. The first and biggest challenge is paying attention to the future long enough to make a plan. Why is thinking about the (far) future so difficult, especially when it comes to money? You might think it is simply because people are short-sighted and greedy. We know from behavioral research, however, that given a choice between a healthy snack and a sweet treat, people will eat the treat now and plan to have the healthy snack next week1.
However, when next week arrives, they do the same thing—indulging their current self now and promising virtuous choices for the future self. And to some extent, we see the same thing with financial behavior—people run up credit card debt to pay for a new TV or a winter vacation. But while I believe that self-control problems and what behavioral economists call “present-biased preferences2 ” are real and important, I think they are probably a relatively minor cause of the difficulty most of us having in thinking about long-term financial planning. I think it is important that people stop beating themselves up over their weakness of will and lack of self-control and realize that long-term planning is actually an unnatural act that requires outsmarting the brain’s natural focus on the present and near-future.
As head of the White House office that deals with government regulation under President Obama, Cass Sunstein pushed for fewer rules and lower costs. His new book lays out a path for simpler, if not smaller, government going forward.
Whenever a federal agency sets new standards, say about the environment, or the financial industry, there's an office inside the White House that has to put the final seal of approval on those regulations. It's called OIRA (pronounced, "Oh, Ira") -- theOffice of Information and Regulatory Affairs.
Up until last year, Cass Sunstein ran that office for President Obama. And he's got a new book about making government, and its rules, work more elegantly. It's called "Simpler".
"Think of a large company which is not going to get smaller. It shouldn't. It should grow. But it can get simpler. It can make the experience for its own employees and for its customers easier," Sunstein says. "My suggestion is that governments can serve their citizens a lot better if they get simpler."
The current regulatory system in the United States is undoubtedly complicated, with state and local agencies issuing their own rules. That's in addition to the sometimes conflicting policies coming out of multiple federal agencies. At Sunstein's former post, OIRA, the focus is on negotiating and solving those potential conflicts.
That can lead to criticism that the office is a convenient place for Presidents to allow inconvenient rules to wither away. Sunstein doesn't agree with that characterization.
There has been substantial debate about whether certain forms of universal moral intuitions “exist” —intuitions that are non-reflective and undefended—and, if so, whether these intuitions have a privileged normative status. This debate arguably has implications for jurisprudential debates about the existence of “natural law.” This essay explores the underappreciated homology between one instantiation of the debates about the nature and quality of intuitive “moral” reasoning, and debates, associated with the Heuristics and Biases (H&B) school and the “Fast and Frugal” (F&F) school, about the nature and quality of our capacity to make “self-interested” decisions.
Some 70 years ago, cybernetics was a hot field; 30 years ago, catastrophe theory was on everyone’s lips. Those Greek-derived words for disciplines that once brought hope of explaining human behavior now evoke a quaint nostalgia, like Polaroids of long-haired young people in bell-bottom jeans and tie-dyed T-shirts. The new buzzword nowadays is big data, the fashionable term for capturing and analyzing the vast collections of information that people reveal about themselves when shopping online at Amazon.com and Travelocity or when writing about themselves on Facebook and Twitter. Big data involves a mix of computer science, information technology, mathematics, and applied statistics. It is increasingly used to sell us products or to persuade us to vote for politicians by tailoring the products’ or politicians’ images to our particular data-generated personas. Some talking heads like to say that computer-aided analysis of patterns will soon replace our traditional methods of discovering the truth in many fields, including medicine, the social sciences, and physics.
Inspired by American behavioral economics, the British government is finding new ways to gently prod people to pay taxes, find jobs and insulate their homes.
A 24-year-old psychologist working for the British government, Mr. Gyani was supposed to come up with new ways to help people find work. He was intrigued by an obscure 1994 studythat tracked a group of unemployed engineers in Texas. One group of engineers, who wrote about how it felt to lose their jobs, were twice as likely to find work as the ones who didn’t. Mr. Gyani took the study to a job center in Essex, northeast of London, where he was assigned for several months. Sure, it seemed crazy, but would it hurt to give it a shot? Hayley Carney, one of the center’s managers, was willing to try.
Ms. Carney walked up to a man slumped in a plastic chair in the waiting area as Mr. Gyani watched from across the room. The man — 28, recently separated and unemployed for most of his adult life — was “our most difficult case,”
Inspired by American behavioral economics, the British government is finding new ways to gently prod people to pay taxes, find jobs and insulate their homes. A 24-year-old psychologist working for the British government, Mr. Gyani was supposed to come up with new ways to help people find work. He was intrigued by an obscure 1994 study that tracked a group of unemployed engineers in Texas. One group of engineers, who wrote about how it felt to lose their jobs, were twice as likely to find work as the ones who didn’t. Mr. Gyani took the study to a job center in Essex, northeast of London, where he was assigned for several months. Sure, it seemed crazy, but would it hurt to give it a shot? Hayley Carney, one of the center’s managers, was willing to try.
What is The Evidence for Quantum Like Interference Effects in Human Judgments and Decision Behavior? This article examines the empirical evidence for interference effects in psychological experiments. It also reviews the competing interpretation of these effects with respect to traditional cognitive models and new quantum cognition models. The conclusion is that quantum theory provides unifying principles for explaining interference effects found in a wide variety of different experimental paradigms, and it provides a viable new theoretical approach for understanding cognition and decision making.
Abstract: With the Patient Protection and Affordable Care Act (ACA) set to sharply increase access to medical care, the problem of rising costs moves center stage in health law and policy discussions. “Consumer directed health care” proposals, which provide patients with financial incentives to equate marginal costs and benefits of care at the point of treatment, demand more decision making ability from boundedly-rational consumers than is plausible. Proposals that seek to change the incentives of health care providers threaten to create conflicts of interest between doctors and patients. New approaches are desperately needed.
This article proposes a government-facilitated but market-based approach to improving efficiency in the private market for medical care that I call “relative value health insurance.” This approach focuses on the “choice architecture” necessary to enable even boundedly-rational patients to contract for the efficient level of health care services through their health insurance purchase decisions. It relies on using comparative effectiveness research, which the ACA funds at a significant level for the first time, to rate medical treatments on a scale of 1-10 based on their relative value, taking into account costs and expected benefits. These relative value ratings would enable consumers to contract with insurers for different levels of medical care at different prices, reflecting different cost-quality tradeoffs.
The article describes both the benefits of the approach and the impediments to its implementation. It concludes with a brief discussion of how the principles can also be applied to public health insurance programs.
Jeffrey V. Butler, Luigi Guiso and Tullio Jappelli
Abstract: Prior research suggests that those who rely on intuition rather than effortful reasoning when making decisions are less averse to risk and ambiguity. The evidence is largely correlational, however, leaving open the question of the direction of causality. In this paper, we present experimental evidence of causation running from reliance on intuition to risk and ambiguity preferences. We directly manipulate participants' predilection to rely on intuition and find that enhancing reliance on intuition lowers the probability of being ambiguity averse by 30 percentage points and increases risk tolerance by about 30 percent in the experimental sub-population where we would a priori expect the manipulation to be successful (males)
This paper has two main objectives: (i) The main objective is to propose a theoretical and methodological delimitation of the Behavioral Economics approach. In this point, the paper argues that such delimitation involves a permanent tension with the hypotheses of rational choice theory of human behavior. (ii) The secondary objective of the paper focuses on the methodology submitted, for this, we present a couple of case studies in order to explain and test such methodology. Furthermore, the case studies will allow us to determinate some work tools of the Behavioral Economics approach.
Abstract Although catering to our biological interests, food companies have been recently accused of contributing to the growing problem of obesity. As a result, managers are torn between trying to satisfy consumers and trying to satisfy concerned public policy officials who bring threats of taxes, fines, restrictions, and legislation. Although the situation appears perplexing, there are profitable “win-win” solutions for both corporations and for consumers. After describing two hard-wired principles that influence food acquisition and consumption, we identify four reversible drivers of food consumption that marketers could use to help consumers better control what and how much they eat.
Despite the great effort that has been dedicated to the attempt to redefine expected utility theory on the grounds of new assumptions, modifying or moderating some axioms, none of the alternative theories propounded so far had a statistical confirmation over the full domain of applicability. Moreover, the discrepancy between prescriptions and behaviors is not limited to expected utility theory. In two other fundamental fields, probability and logic, substantial evidence shows that human activities deviate from the prescriptions of the theoretical models. The paper suggests that the discrepancy cannot be ascribed to an imperfect axiomatic description of human choice, but to some more general features of human reasoning and assumes the “dual-process account of reasoning” as a promising explanatory key. This line of thought is based on the distinction between the process of deliberate reasoning and that of intuition; where in a first approximation, “intuition” denotes a mental activity largely automatized and inaccessible from conscious mental activity. The analysis of the interactions between these two processes provides the basis for explaining the persistence of the gap between normative and behavioral patterns. This view will be explored in the following pages: central consideration will be given to the problem of the interactions between rationality and intuition, and the correlated “modularity” of the thought.
Abstract:We study theory of mind (ToM) and empathic underpinnings of Machiavellianism by use of functional magnetic resonance imaging, where account managers are used as participants in 3 studies. Study 1 finds evidence for activation of the medial prefrontal cortex, left and right temporo-parietal junction, and left and right precuneus regions; all five regions are negatively correlated with Machiavellianism, suggesting that Machiavellians are less facile than non-Machiavellians with ToM skills. Study 2 presents evidence for activation of the left and right pars opercularis, left and right insula, and left precuneus regions; the former four regions of the motor neuron system were positively associated, and the latter negatively associated, with Machiavellianism, implying that Machiavellians resonate more readily with the emotions of others than non-Machiavellians. This is the first study to our knowledge to show a negative correlation between perspective taking and emotional sharing in empathic processes in general and Machiavellianism in particular. Study 3 tests implications of managerial control on both performance and organizational citizenship behaviors, as moderated by Machiavellianism in the field. Our study grounds the functioning of Machiavellianism in organizations in basic neuroscience processes, resolves some long-standing ambiguities with self-report investigations, and points to conditions under which Machiavellianism both inhibits and promotes performance and citizenship behavior.
Abstract We study if taxpayers are loss averse when ﬁling returns. Preliminary deﬁcits might be viewed as losses assuming zero preliminary balances as reference points. Swedish taxpayers can to try to escape such losses by claiming deductions after receiving information about the preliminary balance. Using a regression kink and discontinuity approach, we study data for 3.6 million Swedish taxpayers for 2006. There are strong causal effects of preliminary tax deﬁcits on the robability of claiming deductions.
Compliance will increase and auditing costs will be reduced if preliminary taxes are calibrated so that most tax payers receive refunds.
Per Engstrom - Katarina Nordblom - Henry Ohlsson - Annika Persson