Overview of Behavioral Economics

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  • 1. Soomi Lee Claremont Graduate University Evolutionary and Neuroscientific Basis of Economic Behavior
  • 2. Agenda Behavioral Economics Evolutionary Economics Evidence from Anthropology Evidence from Animal Studies Neuroeconomics
  • 3. Perfect information Unbounded rationality Gandhi-like willpower Unbounded Self-interest
  • 4. Perfect information Unbounded rationality Gandhi-like willpower Unbounded Self-interest Framing effects
  • 5. Perfect information Unbounded rationality Gandhi-like willpower Unbounded Self-interest Framing effects Availability bias
  • 6. Perfect information Unbounded rationality Gandhi-like willpower Unbounded Self-interest Framing effects Mental accounting Availability bias
  • 7. Perfect information Unbounded rationality Gandhi-like willpower Unbounded Self-interest Framing effects Mental accounting Availability bias Hindsight bias
  • 8. Perfect information Unbounded rationality Gandhi-like willpower Unbounded Self-interest Framing effects Mental accounting Availability bias Hindsight bias Anchoring effect
  • 9. Perfect information Unbounded rationality Gandhi-like willpower Unbounded Self-interest Framing effects Mental accounting Availability bias Hindsight bias Anchoring effect Representative fallacy
  • 10. Perfect information Unbounded rationality Gandhi-like willpower Unbounded Self-interest Framing effects Mental accounting Availability bias Hindsight bias Anchoring effect Representative fallacy Confirmation bias
  • 11.
    • In The Ultimatum Game,
    • why does Homo Economicus turn down a free buck?
    • Why do we make the decision?
  • 12. Evolutionary Economics
  • 13.
    • Evolution
    • a complex system that emerges out of the simple actions of organisms just trying to survive and provide for their offspring
    • Economics
    • a complex system that emerges out of the simple actions of people just trying to make a living and provide for their children.
    Evolutionary Economics
  • 14.
    • “ The economy is a self-organized emergent property of complex adaptive systems.”
  • 15.
    • Frédéric Bastiat
    • The Petition of the Candlemakers, 1845
    • How is that millions of people every day cooperate with millions of others to get the bagel at your corner coffee shop? There’s no office or government agency or central hub where all the commerce originates. The web of connections holding the system together is unseen.
    Evolutionary Economics
  • 16.
    • Adam Smith
    • The Wealth of Nations, 1776
    • “ It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
    Evolutionary Economics
  • 17. Evolutionary Economics The study of the economy as an evolutionary complex adaptive system grounded in a human nature that evolved functional adaptation to survival as a social primate species in the Paleolithic epoch in which we evolve
  • 18. Evolutionary Economics The study of the economy as an evolutionary complex adaptive system grounded in a human nature that evolved functional adaptation to survival as a social primate species in the Paleolithic epoch in which we evolve
  • 19. Evolutionary Economics The study of the economy as an evolutionary complex adaptive system grounded in a human nature that evolved functional adaptation to survival as a social primate species in the Paleolithic epoch in which we evolve
  • 20. Evolutionary Time Line
  • 21. Evolutionary Time Line Homo Sapiens
  • 22. Evolutionary Time Line Homo Sapiens The Neolithic Revolution
  • 23. The Evolution of Human Groups Time Before Present Group Number of Individuals 100,000-10,000 years Bands 10s-100s 10,000-5,000 years Tribes 100s-1000s 5,000-3,000 years Chiefdoms 1000s-10,000s 3,000-1,000 years States 10,000s-100,000s 1,000 years Empires 100,000s-1,000,000s
  • 24. The Evolution of Human Groups Egalitarian Hierarchical Time Before Present Group Number of Individuals 100,000-10,000 years Bands 10s-100s 10,000-5,000 years Tribes 100s-1000s 5,000-3,000 years Chiefdoms 1000s-10,000s 3,000-1,000 years States 10,000s-100,000s 1,000 years Empires 100,000s-1,000,000s
  • 25. food acquisition, hunting, food sharing, child rearing, mobility, camp construction, and defense Integrated System of Reciprocal Altruism among the Aché
  • 26. Percentage of male deaths caused by warfare South American hunter-gatherer groups
  • 27. Percentage of male deaths caused by warfare 20c U.S. and Europe South American hunter-gatherer groups
  • 28. The Correlation between Military Success and Reproductive Success among the Yanamamo
  • 29.
    • Fairness evolved as a stable strategy for maintaining social harmony.
    • Cooperation is enforced and freeloading is punished.
  • 30.
    • Monkeys show a sense of justice
    • They will protest if they see another monkey get paid more for the same task.
  • 31.
    • Turning down $1 is a predictable choice.
  • 32. N.e.u.r.o.e.c.o.n.o.m.i.c.s
  • 33.
    • The use of data on brain processes to suggest new underpinnings for economic theories.
    Neuroeconomics
  • 34.
    • HUMAN BRAIN = BLACK BOX?
  • 35. William S. Jevons (1835-1882) wrote, “I hesitate it is impossible to measure the feelings of the human heart.” How to measure feelings?
  • 36. Feeling and thoughts can be measured!!! Now,
  • 37. Animal model Psychological reactions Brain image Single-neuron measurement Psychopathology Brain damage in humans How to measure?
  • 38. Brain function Frontal Lobe: Reasoning, problem solving, emotional control Parietal Lobe: Cognition Occipital Lobe: Vision Temporal Lobe: Hearing, memory acquisition
  • 39. The human brain is a mammalian brain with a larger cortex. “Human behavior will generally be a compromise between highly-evolved animal emotions and instincts, and more recently-evolved human deliberation and foresight.” (Loewenstein 1996) PASSION + REASON
  • 40. Automaticity Modularity Sense-making Three human brain functions
  • 41. Automatic and rapid brain activities without awareness Automaticity
  • 42. Like organs of the body Mentalizing (theory of mind) Modularity
  • 43. Pattern-seeking Sense-making
  • 44. The process of choices are not only logical but also emotional.
  • 45. Amygdala “ The Quick and Dirty Route”
  • 46.
    • We seek and find confirmatory evidence
    • in support of already existing beliefs and
    • ignore or reinterpret disconfirmatory evidence.
    Confirmation Bias
  • 47. Dopamine The Prediction Addiction and Drug Addiction Scoring financially is almost indistinguishable from scoring a hit off an addictive drug.
  • 48. Oxytocin Trust and Generosity
  • 49.
    • Turning down $1 is an emotional-driven choice.
    • “ Do not insult me.”
  • 50. Discussion What are the implications of evolutionary economics and neuroeconomics?