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Behavioral economics
 

Behavioral economics

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  • The book cites some interesting research and examples on each of these findings. Here’s an additional example of giving too much weight to vivid observations: After a rock star is killed in a plane crash, people start taking the train more and flying less.
  • Embodied
  • Another example of time inconsistency: A worker plans to start saving 20% of her income 3 months from now, because she must first pay off some overdue bills. After 3 months pass, the worker savings nothing and instead spends all her monthly income. Here is the classic textbook example of time inconsistency (from Mankiw’s intermediate macro text, and other textbooks): The government announces a policy of not negotiating with terrorists who take hostages. The policy is intended to deter terrorists, make them believe they would gain nothing by taking hostages. But terrorists know that once they have hostages, the government will be tempted to try to negotiate for the hostages’ lives.

Behavioral economics Behavioral economics Presentation Transcript

  • Bounded Rationality: Thinking Is Costly A baseball and bat together cost $11. The bat costs $10 more than the ball. How much does the ball cost? Write down your answer. Half of Harvard students said $1, which is the intuitive answer but wrong! Correct answer is 50 cents: $10.50-$.50 = $10.00 People tend to use “intuitive thinking” or rules of thumb
  • CONCURRENT SCHEDULES OF REINFORCEMENT Study of choice centers on how operant behavior is affected its reinforcement history and by reinforcement history of other operant behaviors.  Research uses concurrent schedules: two or more schedules that operate simultaneously and independently, each for a different response.
  • Concurrent schedules of reinforcement Two schedules are in effect at the same time and the subject is free to switch from one response alternative to the other Key A Key B Schedule A VI 60 s Schedule B FR 10
  • Choice Behavior and the Matching Law  Relative rate of responding on a particular lever equals the relative rate of reinforcement on that lever The Matching Law is a mathematical statement describing the relationship between the rate of responding and the rate of reward  developed by Herrstein
  • Matching Law RA/(RA + RB) = rA/(rA + rB) or RA /rA = RB /rB RA = Responses to A RB = Responses to B rA = Reinforcers to A rB = Reinforcers to B
  • Matching Law Provides accurate description of behavior of many organisms in many different choice situations. Different species Appetitive and aversive stimuli Frequency, magnitude, and delay of reinforcement
  • People Aren’t Always Rational Studies find that people make systematic mistakes:  People are overconfident.  People give too much weight to a small number of vivid observations.  People are reluctant to change their minds. Even though people are not always rational, the assumption that they are is usually a good approximation for economic modeling.
  • Deviations from Matching
  • Impatience: the desire for instant gratification Read, Loewenstein & Kalyanaraman (1999) Choose among 24 movie videos Some are “low brow”: My Cousin Vinny Some are “high brow”: Schindler’s List  Picking for tonight: 56% of subjects choose low brow.  Picking for next Thursday: 37% choose low brow.  Picking for second Thursday: 29% choose low brow. Tonight I want sugar-coated entertainment… next week I
  • Choice with Commitment In a standard concurrent schedule of reinforcement, two (or more) response alternatives are available at the same time and the subject is free to switch from one to the other at any time However, in some (real-life) situations, choosing one alternative makes other alternatives unavailable In these cases, the choice may involve assessing complex, long-range goals Can study these types of situations in the lab using a Concurrent-chain schedule of reinforcment
  • Terminal link BA Time Choice link Reinforcement schedule A (VR 10) Reinforcement schedule B (FR 10) Pecking the left key in the choice link puts into effect reinforcement schedule A in the terminal link. Pecking the right key in the choice link puts into effect reinforcement schedule B in the terminal link. Concurrent-chain schedule
  • BA Time Small reward Large reward Delay A B Small reward Large reward Delay Direct-choice procedure Pigeon chooses immediate, small reward Concurrent-chain procedure Pigeon chooses the schedule with the delayed, larger reward
  • Self-Control Concurrent chain schedules have been used to study ‘self-control’ in the lab e.g., choosing a large delayed reward over an immediate small reward With direct choice procedures, animals often lack self-control. That is, they choose the immediate, but smaller reward With concurrent-chain procedures, animals do show self-control. That is, they choose the larger, but delayed reward
  • Choosing fruit vs. chocolate Time Choosing Today Eating Next Week If you were deciding today, would you choose fruit or chocolate for next week?
  • Patient choices for the future: Time Choosing Today Eating Next Week Today, subjects typically choose fruit for next week. 74% choose fruit
  • Impatient choices for today: Time Choosing and Eating Simultaneously If you were deciding today, would you choose fruit or chocolate for today?
  • Time Inconsistent Preferences: Time Choosing and Eating Simultaneously 70% choose chocolate
  • Rachlin and Green (1972) If you delay the reinforcer for both a larger and smaller reinforcer and then you give organism a choice, it may well choose the larger delayed reinforcer 10 second delay 10 second delay 2 seconds food immediate 4 seconds food Must wait 4 seconds 4 seconds food Must wait 4 seconds FR - 15 FR - 15
  • Self-Control  Why does anyone choose a smaller reward part of the time?  Animals and people typically choose a small immediate reward over a larger delayed reward.  Large rewards are selected when:  The choice is made in advance of reward.  Reinforcers are not visible or reward is already present (pleasurable activity).
  • What mechanism may account for this short temporal horizon?  Two Brain System Theory of Addiction  Increased activity of the Impulsive System (motivational)  Extented Amygdala  Ventral Striatum  Decreased activity of Executive System (rationality)  Ventromedial Prefrontal Cortex (VMPC)  Dorsolaterial Prefrontal Cortex (DLPC)
  • Self-Control  Temporal Issue  Lack of self-control arises from the fact that our behavior is more heavily influenced by immediate consequences as opposed to delayed consequences. Immediate Consequence Delayed Consequence quitting withdrawal Improved health smoking Nicotine high Deterioration of health Self-control – preference for larger later reward Impulsiveness – preference for smaller sooner reward
  • Which do you prefer $500 now or $1,000 in two years $500 in four years or $2,000 in six years
  • People Are Inconsistent Over Time People tend to prefer instant gratification, even when delaying would increase the gratification. Result: People fail to follow through on plans to do things that are dreary, take effort, or cause discomfort.  e.g., people often save less than they plan To help follow through, people look for ways to commit themselves to their plans.  e.g., worker has money taken out of paycheck before he ever sees it
  • Choice and Foraging Laboratory paradigms are often criticized because they do not capture essence of natural contingencies.  More recent research has tried to bring natural contingencies of reinforcement into laboratory.  This move has been prompted by optimal foraging theory.
  • Choice and Foraging  Optimal foraging theory: feeding behavior is sensitive to relation between amount of energy expended in finding, securing, and consuming food, and amount of energy or nutrition of food.  Patterns of foraging optimize relation between energy gain and energy expenditure. Optimal foraging theory: feeding behavior is sensitive to relation between amount of energy expended in finding, securing, and consuming food, and amount of energy or nutrition of food. Patterns of foraging optimize relation between energy gain and energy expenditure
  • Behavioral Economics  Behavioral economics: a new field in which economists apply basic insights from psychology  People aren’t always as rational as traditional economic models assume.  Herbert Simon viewed humans as satisficers, people who make choices that are merely “good enough” rather than optimal.  Other economists have suggested that people are only “near rational” or exhibit “bounded rationality.”
  • OPERANT BEHAVIOR AND ECONOMICS It is not surprising that behavior theorists have applied economic concepts to their own domain. Matching Law is viewed by some theorists as special case of general economic principles.
  • OPERANT BEHAVIOR AND ECONOMICS: BASICS Demand (amount purchased at given price):  Elastic (luxuries)  Inelastic (necessities) Commodities:  Substitutes (more of one, less of other)  Complements (more of one, more of other) Income (money or responses required to purchase commodities at given price)
  • OPERANT BEHAVIOR AND ECONOMICS: BASICS Demand (amount purchased at given price):  Elastic (luxuries)  Inelastic (necessities) Commodities:  Substitutes (more of one, less of other)  Complements (more of one, more of other) Income (money or responses required to purchase commodities at given price) Rodents = Bar press
  • OPERANT BEHAVIOR AND ECONOMICS: BASICS Economy (relationship between commodities and income:  Closed (fixed income)  Open (extra income): most operant studies Deprivation
  • People Care About Fairness People’s choices are sometimes influenced more by their sense of fairness than self-interest. Example: the ultimatum game The rules  Two players who do not know each other have a chance to share a prize of $100.  Player A decides what portion of the prize to give to player B.  B must accept the split or both get nothing.
  • People Care About Fairness Predicted outcome if both players rational  A would propose a 99-1 split and B would accept, because $1 is better than nothing. Actual outcome from experiments with real people  B usually rejects lopsided splits like 99-1 as wildly unfair.  Expecting this, A usually proposes giving $30 or $40 to B.  B views this as unfair, but not so much as to abandon his self-interest, so B accepts.
  • People Care About Fairness The results of the ultimatum game apply in other situations. Example: A firm may pay above-equilibrium wages during profitable years to be fair, or to avoid appearing unfair and risking retaliation from workers.
  • OPERANT BEHAVIOR AND ECONOMICS  Evidence suggests behavior of animals in conditioning experiments conforms to what economic theory says people will do when confronted with similar choices.  Implies that operant behavior involves a kind of economic decision making.  Animals must decide how to allocate scarce behavioral resources; rules by which they do so are like those people use.  Economic theory and behavior theory may jointly explain human and animal choice.