Economic cognition


Published on

A review of micro-, experimenal- and neuro-economics

Published in: Economy & Finance, Technology

Economic cognition

  1. 1. Economic Cognition: Affective Moves in Cultural Games Benoit Hardy-Vallée Department of Philosophy University of Waterloo [email_address]
  2. 2. Content <ul><li>‘ Economic Cognition’ </li></ul><ul><li>Rational-choice theory </li></ul><ul><li>Bounded rationality & behavioral Economics </li></ul><ul><li>Recent trends in the study of economic cognition </li></ul><ul><ul><li>Emotional, Social-cultural, Neural aspects of economic cognition (neuroeconomics) </li></ul></ul>
  3. 3. Economic Cognition <ul><li>The study of mechanisms of perception, inference, decision, action & choice behavior in the economic domain </li></ul><ul><li>More than “consumer psychology”: </li></ul><ul><ul><li>Economics is “ the science which studies human behavior as a relationship between ends and scarce means which have alternative uses” (Robbins, 1932). </li></ul></ul><ul><li>Scarcity  Decisions  Preferences  Valuation  Goals </li></ul>
  4. 4. Economic Cognition <ul><li>The study of valuation in decision-making and strategic interaction </li></ul><ul><ul><li>Formal, logical: Classical economics </li></ul></ul><ul><ul><li>Empirical: Experimental, Cognitive, Behavioral, Cross-cultural economics </li></ul></ul><ul><ul><li>Neural: neuroeconomics </li></ul></ul><ul><ul><li>Computational: neural modeling, agent-based computational economics, computable economics </li></ul></ul>
  5. 5. Origins of economic cognition <ul><li>‘ Logic of action’ (normative) vs ‘abstract psychology’ (descriptive) </li></ul><ul><ul><li>Bentham: utility as happiness (max. pleasure, min. pain) </li></ul></ul><ul><ul><li>Mills: distinction of higher (happiness) vs. lower pleasures </li></ul></ul><ul><ul><li>Edgeworth: self-interest </li></ul></ul><ul><li>Pareto: “ophelimity”: utility without psychology </li></ul><ul><li>Formalization of rational-choice theory: decision theory and game theory </li></ul>
  6. 6. Rational-choice theory <ul><li>Expected Value (mathematical expectation): </li></ul><ul><ul><li>objective probability * objective value </li></ul></ul><ul><li>Expected Utility (Bernouilli): </li></ul><ul><ul><li>objective probability * subjective utility of objective value </li></ul></ul><ul><li>Subjective Expected Utility (Modern Decision Theory): </li></ul><ul><ul><li>Subjective probability of an event * subjective utility of objective value </li></ul></ul><ul><ul><li>Preferences should be ordered, transitive, and comparable </li></ul></ul>
  7. 7. Rational-choice theory <ul><li>Homo Economicus </li></ul><ul><li>Single agents maximize their subjective expected utility </li></ul><ul><li>Interacting agent select Nash equilibrium strategy </li></ul>
  8. 8. Rational-choice theory Go free >> 4 2 years >> 3 5 years >> 2 10 years >> 0
  9. 9. Problems with RCT <ul><li>Encoding </li></ul><ul><ul><li>RCT supposes we are fully informed about us and the world </li></ul></ul><ul><li>Computation </li></ul><ul><ul><li>RCT does not take into account the scarcity of cognitive resources </li></ul></ul><ul><li>Abstraction </li></ul><ul><ul><li>Emotions, culture, evolution, environment and sociality are neglected </li></ul></ul><ul><li>Realism </li></ul><ul><ul><li>Many experiments showed that humans choice behavior does not comply with RCT </li></ul></ul><ul><ul><ul><li>Decision theory: loss-, risk- and ambiguity-aversion </li></ul></ul></ul><ul><ul><ul><li>Game Theory: subjects cooperate and trust each other </li></ul></ul></ul>
  10. 10. Example: The Ultimatum Game <ul><li>Proposer (P) – Responder (R) </li></ul><ul><ul><li>P proposes a split </li></ul></ul><ul><ul><li>R accepts or rejects </li></ul></ul><ul><ul><li>Rejection = both players get nothing </li></ul></ul><ul><ul><li>Nash equilibrium: smallest possible offer (P), any offer (R) </li></ul></ul><ul><ul><li>Real behavior: ‘fair’ (around 50/50) offer (P), rejection of ‘unfair’ split (R) </li></ul></ul>
  11. 11. Behavioral economics and Bounded Rationality <ul><li>H.A. Simon, A. Tversky, D. Kahneman: decision-making and economic cognition should be empirically investigated </li></ul><ul><ul><li>Lab experiments, surveys, computational modeling, etc. </li></ul></ul><ul><li>How vs. why : procedural , not substantive, rationality </li></ul><ul><ul><li>The judgment that certain behavior is “rational” or “reasonable” can be reached only by viewing the behavior in the context of a set of premises or “givens.” These givens include the situation in which the behavior takes place, the goals it is aimed at realizing, and the computational means available for determining how the goals can be attained. (Simon, 1986, p. 26) </li></ul></ul>
  12. 12. Heuristics and Biases <ul><li>‘ Cognitive illusions’ </li></ul><ul><li>Heuristics: shortcuts to solve complex problems rapidly </li></ul><ul><li>Framing: the particular way of representing a decision context (as a gain, a loss, etc.) </li></ul><ul><li>Bias: cognitive bias that lead agents to deviate from rational standards </li></ul><ul><ul><li>ex: base-rate neglects, fundamental attribution error, confirmation bias, overconfidence, conjunction fallacy </li></ul></ul>
  13. 13. Heuristics and Biases <ul><li>Imagine that the United States is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows: </li></ul><ul><ul><li>If Program A is adopted, 200 people will be saved </li></ul></ul><ul><ul><li>If Program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved </li></ul></ul><ul><ul><li>Which of the two programs would you favor? </li></ul></ul><ul><li>Most of the respondent opted for A, the risk-averse solution. </li></ul>
  14. 14. Heuristics and Biases <ul><li>Other version: </li></ul><ul><ul><li>If Program A is adopted, 400 people will die </li></ul></ul><ul><ul><li>If Program B is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die </li></ul></ul><ul><li>Although its subjective expected utility is identical, option B was the most popular. </li></ul>
  15. 15. From Bounded to Ecological Rationality <ul><li>Cognitive mechanisms are best understood as fitting the demands and structure of particular environmental niches </li></ul><ul><li>Cognitive mechanisms operating outside of their proper niche may deliver irrational behavior </li></ul><ul><li>Domain-specificity: proper domain vs. actual domain. </li></ul>
  16. 16. Economic cognition is <ul><li>Emotional </li></ul><ul><li>Social-cultural </li></ul><ul><li>Neural </li></ul><ul><li>2 examples: Ultimatum Game and Risk-aversion </li></ul>
  17. 17. Risk/loss aversion <ul><li>100$ for sure or a 10% chance of having 1001$? </li></ul><ul><ul><li>Subjects are risk-averse in gains, risk-seeking in losses </li></ul></ul><ul><ul><li>Risk aversion is explained by loss aversion </li></ul></ul><ul><ul><li>Robust finding, even in children and monkeys </li></ul></ul>
  18. 18. Risk/loss aversion <ul><li>Damasio: patient with damage in the ventromedial prefrontal cortex (vmPFC) behave irrationally </li></ul><ul><ul><li>Financial losses, losses in social standing, and losses of family and friends </li></ul></ul><ul><ul><li>Unable to learn from previous mistakes </li></ul></ul><ul><ul><li>Intellect and problem-solving abilities were largely normal </li></ul></ul><ul><ul><li>No affect, and no reaction to emotional situations </li></ul></ul><ul><ul><li>Suboptimal strategy in Iowa Gambling Task </li></ul></ul>
  19. 20. Risk/loss aversion <ul><li>Risk aversion is emotional and rational </li></ul><ul><li>(Damasio) Somatic-marker hypothesis: Bodily states ‘mark’ options as advantageous/disadvantageous </li></ul><ul><li>Ex: skin-conductance response (SCR) </li></ul><ul><ul><li>Patients with vmPFC damage have no SCR in anticipatory situations, only in experienced reward/punishment </li></ul></ul><ul><ul><li>Patients with amygdala damage have same symptoms + impaired SCR in experienced reward/punishment </li></ul></ul><ul><ul><li>vmPFC: anticipation of emotional impact (anticipated utility) </li></ul></ul><ul><ul><li>Amgydala: registers emotional impact (experienced utility), </li></ul></ul>
  20. 21. <ul><li>Conclusion: </li></ul><ul><ul><li>Emotions play a role in guiding decisions, especially when outcomes are uncertain </li></ul></ul><ul><ul><li>We need emotions to make rational decisions </li></ul></ul><ul><ul><li>Inability to use emotions lead to irrationality </li></ul></ul><ul><ul><li>Fear and anxiety detect risky choices </li></ul></ul>
  21. 22. Risk/loss aversion <ul><li>Analytic vs Holistic systems of thought (Nisbett et al.) </li></ul><ul><li>Metaphysical systems and tacit epistemologies differ East/West, and in individualist/collectivist culture. </li></ul><ul><li>Reflected in neural processing </li></ul><ul><ul><li>neural substrates of representation of self and close others vary East/West: </li></ul></ul><ul><ul><li>Chinese individuals use MPFC to represent both mother and the self. In contrast, MPFC activity corresponds to a representation of only the individual self in Western subjects </li></ul></ul>
  22. 23. <ul><li>Reflected in decision-making strategies: </li></ul><ul><ul><li>Chinese subjects exhibited less probabilistic thinking and riskier gambling decisions. </li></ul></ul><ul><ul><li>Individualist cultures are more risk-averse, collectivist culture more risk-prone (in financial investment experiments). </li></ul></ul><ul><ul><li>Expl: ‘cushion hypothesis’: people in a collectivist society are more likely to receive financial help if they are in need </li></ul></ul>
  23. 24. Ultimatum Game <ul><li>Heirich et al: differences in economic organization explains differences in strategic interactions </li></ul><ul><ul><li>Payoff to cooperation (cooperating with extrafamilial individuals) </li></ul></ul><ul><ul><li>Market integration </li></ul></ul>
  24. 27. <ul><li>Variation in the ultimatum game </li></ul><ul><ul><li>Ps make offers that Rs will consider fair, based on what people in this culture consider fair </li></ul></ul><ul><ul><li>North Americans and Europeans consider that a fair split is at least 20% </li></ul></ul><ul><ul><li>Machiguengas in Peruvian Amazon judge that low offers are worth accepting </li></ul></ul><ul><ul><li>Gypsy people in a neighborhood of Madrid justified their acceptation of unfair split by saying “if he really needs it…” </li></ul></ul>
  25. 28. Ultimatum Game <ul><li>anterior insula, associated with negative emotional states like disgust or anger; </li></ul><ul><ul><li>“ moral disgust” </li></ul></ul><ul><ul><li>more active when unfair offers are proposed. </li></ul></ul><ul><ul><li>significantly lower when the proposer is a computer </li></ul></ul><ul><ul><li>offers and their rejection are associated with greater skin conductance </li></ul></ul><ul><ul><li>correlated with the degree of unfairness and with the decision to reject unfair offers </li></ul></ul>
  26. 29. <ul><li>dorsolateral prefrontal cortex, associated with cognitive control, attention, and goal maintenance; </li></ul><ul><li>anterior cingulate cortex, associated with cognitive conflict, motivation, error detection and emotional modulation </li></ul>
  27. 30. Trust Game A. (Y$) B. (Y$) x$ x 3=  x$  3x$ 1. 2. A. (Y-x $) B. (Y + 3x$)  Z$ A. (Y-x)+Z $) B. (Y + 3x) –Z $) 3.
  28. 31. <ul><li>“ Limbic grasshopper” and “prefrontal ant”. </li></ul><ul><ul><li>McClure, S. M., Laibson, D. I., Loewenstein, G., & Cohen, J. D. (2004). Separate neural systems value immediate and delayed monetary rewards. Science , 306(5695), 503-507. </li></ul></ul><ul><li>Explanation of preferences (ex: Coke vs. Pepsi) </li></ul><ul><ul><li>McClure, S. M., Li, J., Tomlin, D., Cypert, K. S., Montague, L. M., & Montague, P. R. (2004). Neural correlates of behavioral preference for culturally familiar drinks. Neuron, 44(2), 379-387. </li></ul></ul><ul><li>Oxytocin </li></ul><ul><ul><li>Zak, P. J., Kurzban, R., & Matzner, W. T. (2005). Oxytocin is associated with human trustworthiness. Horm Behav, 48(5), 522-527. </li></ul></ul><ul><ul><li>Kirsch, P., Esslinger, C., Chen, Q., Mier, D., Lis, S., Siddhanti, S., et al. (2005). Oxytocin modulates neural circuitry for social cognition and fear in humans. J Neurosci, 25(49), 11489-11493. </li></ul></ul><ul><ul><li>Kosfeld, M., Heinrichs, M., Zak, P. J., Fischbacher, U., & Fehr, E. (2005). Oxytocin increases trust in humans. Nature, 435(7042), 673-676. </li></ul></ul><ul><li>TD learning and Dopamine </li></ul><ul><ul><li>Tobler, P., Fiorillo, C., & Schultz, W. (2005). Adaptive coding of reward value by dopamine neurons. Science, 307(5715), 1645. </li></ul></ul><ul><ul><li>Schultz, W. (2001). Reward signaling by dopamine neurons. Neuroscientist, 7(4), 293-302. </li></ul></ul><ul><ul><li>Bayer, H. M., & Glimcher, P. W. (2005). Midbrain dopamine neurons encode a quantitative reward prediction error signal. Neuron, 47(1), 129. </li></ul></ul><ul><li>PD and the “warm glow” of cooperation </li></ul><ul><ul><li>Rilling, J., Gutman, D., Zeh, T., Pagnoni, G., Berns, G., & Kilts, C. (2002). A neural basis for social cooperation. Neuron, 35(2), 395-405. </li></ul></ul>
  29. 32. Conclusion: <ul><li>Affective Moves in Cultural Games </li></ul><ul><li>Notes, refs: </li></ul><ul><li> </li></ul><ul><li>[email_address] </li></ul><ul><li>HH-329 </li></ul>