Hierarchical decision making for evolutionary economics


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Pavel Luksha. Presentation for European Association of Evolutionary Political Economists 2009 on hierarchically structured models of consumer choice.

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Hierarchical decision making for evolutionary economics

  1. 1. Hierarchically Structured Consumer Choice in Evolutionary Economics EAEPE’2009 Annual Conference, Amsterdam 7 November 2009 Pavel Luksha (University of Hertfordshire, UK & Institute of Economics, Russia) Vladimir Maevsky (Institute of Economics, Russia)
  2. 2. Modelling human choice <ul><li>Economics is a study of human choices (Coase) </li></ul><ul><li>Change of economics will not be possible unless we abandon the utility function (Foss, 2007; Lilien et al., 2002 etc.) </li></ul><ul><li>… Completely agree </li></ul>
  3. 3. No real remedy for utility function <ul><li>What is so bad about the utility function? </li></ul><ul><ul><li>unrealistic assumptions (unlimited information absorbing and processing capacity) </li></ul></ul><ul><ul><li>implicit assumption: everything is measured by money (utility units <> money units) </li></ul></ul><ul><li>Bounded rationality assumptions are only partial remedy </li></ul><ul><li>Etzioni: ‘money-based’ utility + ‘moral values’: </li></ul><ul><ul><li>2 levels of utility: Hell & Heaven, Devilish & Divine </li></ul></ul><ul><ul><li>hm… are we that simple? </li></ul></ul>
  4. 4. Hierarchical decision making <ul><li>Bounded rationality + economy of action: hierarchical information processing is a solution to complex calculation problems (e.g. Tversky, Sattah, 1979; Hauser, 1985; Devetag, 1999) </li></ul><ul><li>Hierarchical decision making (HDM) is an evolutionary solution for information processing in complex environments faced by animals </li></ul><ul><li>HDM departs from ordinal utility comparison: a multi-aspect comparison </li></ul>
  5. 5. HDM & economic choices <ul><li>HDM is a universal mechanism </li></ul><ul><li>[yet] (Economic) choices are always concrete choices (refer to concrete experiences and real opportunities) </li></ul><ul><li>[thus] (Economic) choices are learnt (minor share of choices may be innate) – and for humans, large share of this learning is social learning </li></ul><ul><li>[and] Learning is always context-based (and contexts are individual & set by markers) </li></ul>
  6. 6. (Intermediate) conclusion <ul><li>If economics is a study of choices, it should focus on (realistic) hierarchically-based choice models </li></ul><ul><li>Choices are driven by non-monetary as well as monetary criteria (context markers) </li></ul><ul><li>Understanding of learning processes is instrumental in understanding choices </li></ul>
  7. 7. Consumer choices <ul><li>In the hierarchically structured consumer choice procedure (Maevsky, Chernavsky, 2007), the consumer does not compare all possible sets of options, but ‘narrows down’ her set of options making a limited number of choices in a limited number of steps through HDM </li></ul><ul><li>This is a marketing / behavioural psychology understanding that can also be adapted by economists </li></ul>
  8. 8. Hierarchically structured consumer choice process … . ….. goods class: e.g., durable goods goods category: e.g., TV-sets sub-category: e.g., plasma panels sub-sub-category: e.g., size
  9. 9. Evolution of consumption: individual level variety of concrete goods for consumer incentives for revision existing set X new set X’ social pressures economic pressures ‘ internal’ pressures peer comparison experts advertising price changes budget changes curiousity tiredness / loss of interest key effects : - Veblenian - bandwagon - snob evolutionary variation of concrete goods in the consumption set
  10. 10. Coevolution dynamics (1): product categories <ul><li>Social learning & socio-economics pressures homogenize preferences (consumers imitate each other in how to best satisfy their needs / wants, and in what order…) </li></ul><ul><li>Producers adapt to homogenized preferences (also imitate each other) </li></ul><ul><li>Emergent categorization is institutionalized (as part of industrial architecture), and so becomes agenda-setting for consumers as well as producers </li></ul><ul><li>Thus, despite unique individual learning paths, we have typical products & consumer behaviour models </li></ul>
  11. 11. Coevolution dynamics (2): variety in consumer and producer populations <ul><li>Individual learning & imitation, changes in demography, and social transformations expand the variety of wants and needs in consumer populations </li></ul><ul><li>Producers expand variety of products through innovation </li></ul><ul><li>Interplay of variety in consumer and producer populations leads to expansion or dilution of product categories and creation of new categories (cf. Witt, 2001) </li></ul><ul><li>Firms can further impact this process via advertising and agenda-setting </li></ul>
  12. 12. Hierarchically based consumer choices in evolution of industries <ul><li>Industry dynamics as the interplay between homogenizing and expansion of variety in both consumer and producer populations </li></ul><ul><li>Industry structure is shaped by, and shapes, typical hierarchies of consumer preferences & decision-making </li></ul>