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SN- Lecture 4


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SN- Lecture 4

  1. 1. Block 2 Individual Behavior
  2. 2. To describe the model of rational action To understand some empirical findings that modify the theory: social preferences Aim of Block 2
  3. 3. Rational . Choice . Theory LECTURE 4
  4. 4. To understand what rational action implies To understand the design of experimental studies in social sciences Aim Lecture 4
  5. 5. Up Until Now Social Problems are to be explained scientifically Explanations should consider the link between individual and aggregate behavior A theory of action is necessary * We will use Rational Choice Theory for this purpose *
  6. 6. Central Assumption Rational Choice Theory Decision-makers have logically consistent goals (whatever they are), and, given these goals, choose the best available option.
  7. 7. Rational Choice The Model AIM: To explain the decisions of individuals and the individual, and, in particular, the social consequences of those decisions.
  8. 8. Core Elements Rational Choice Model Preferences Constraints Beliefs Optimal Decision Outcome (Prediction): Equilibrium Decision Theory Social Interactions
  9. 9. Choice Depends On How individuals rank the available alternatives according to their subjective tastes Preferences: In which stock you invest will probably depend on your expectations about the future earnings potential of that stock Beliefs: The set of alternatives that are available to an individual (i.e., Ferrari vs Ford) Constraints:
  10. 10. Utility Maximization Choose a feasible option that best satisfies the individual’s preferences Individuals
  11. 11. Conditions on Preferences An individual can compare all relevant alternatives and rank them 1. Complete If you prefer A over B, and B over C, then you should prefer A over C 2. Transitive The relative attractiveness of two options does not depend on other options available to the decision-maker 3. Independent of irrelevant alternatives
  12. 12. Sociology Social outcomes of the interaction of individuals Interested in: Social outcomes from the Equilibrium perspective
  13. 13. Equilibrium Analysis Economics Biology Non-Life related sciences Common to other fields
  14. 14. What is it? It is a situation in which several things that have been interacting, adjusting to each other and to each other’s adjustment, are at last adjusted, in balance, at rest (Schelling, Micromotives & Macrobehavior) Equilibrium:
  15. 15. Examples Equilibrium If prices from place to place do not differ more than transport costs between those places Market for gasoline: If, considering where everybody else is sitting, nobody is motivated to move to another seat The seating pattern
  16. 16. The selfish assumption Decision-makers are SELF-REGARDING A common assumption in RCT is that: (+) TRACTABILITY IN MODELING Exact predictions, which can be confronted with appropriate data, that might refute the selfishness assumption Experiments
  17. 17. Is it violated? It seems to be violated by the fact that many people vote, even in anonymous situations, take part in collective actions, often manage not to overuse common resources, care for the environment, mostly do not evade taxes on a large scale, donate, and so forth... The selfish assumption
  18. 18. Don’t discard it yet! Many factors might give even selfish individuals an incentive to behave pro-socially, although they are not so motivated. In reality Repeated interactions
  19. 19. This is widely studied *But first a practical* In laboratory experiments
  20. 20. Practical 3 In the rational choice theory block we will participate in various canonical experiments Lecture 4 Vernon Smith Nobel Prize 2002 (shared with Kahneman) Demand & Supply
  21. 21. Experimental Studies Social Sciences in
  22. 22. We will cover Experimental Economics What are experimental studies in Soc. Sc. Example of how to coduct an experiment Coherent Arbitrariness The experimental method Procedural and design issues
  23. 23. What’s Experimental Economics? Data are collected in a controlled enviornment Discipline in which becoming experimental sciences like physics or biology Social Sciences Like theory running experiments is an established method to explain and/or describe social activity
  24. 24. Experimental Method Advantages of the experiments Control Institutions (i.e., voting rules, communication, etc) Incentives (payoffs) - not always complete control (i.e., altruism) Randomization - avoids some self-selecting problems Replication Check for robustness, experimental effects, etc Gives an incentive to do it right Make available: data, instructions, program, and procedures
  25. 25. How to conduct an experiment Example “Coherent Aribitrariness” Dan Ariely, George Lowestein, Drazen Frelec Are preferences stable or are they affected by irrelevant information? How do people evaluate the value of a good? Do we have preferences over goods we have not consumed? Are preferences completely random?
  26. 26. Structure Experiment Research Question Design Treatment Variables Session . . .
  27. 27. Ordinary Goods Valuing ordinary goods Collection of sessions to evaluate a research question Are preferences stable or are they affected by irrelevant information? Are preferences completely random? Description of the task performed by subjects Ask subjects if they want to buy the good for a price equal to a random anchor Random anchor: Last two digits of their Social Security Number (SSN) Experiment: Design:
  28. 28. Laboratory Experiments They create decision-dependent financial incentives To measure People’s behavior in situations in which true opportunity cost for their decisions exists, and are known by the researcher Collection of sessions to evaluate a research question
  29. 29. Ordinary Goods Description of the task performed by subjects Ask subjects if they want to buy the good for a price equal to a random anchor Random anchor: Last 2 digits of their Social Security Number (SSN) Previous slideResearch Question: Design: Give monetary value to 4 goods (market value around $70) Elicit their willingness to pay (WTP) for the good
  30. 30. Ordinary Goods Environment/parameters of interest varied by the experimenter High, middle, low anchors Treatment Variables: Between-subjects variations: different subjects get different parameters avoids “contamination” between treatments + Different qualities of similar goods+ Within-subjects variations: same subjects get different parameters Control for individual characteristics Must control for sequence effects (i.e., due to learning) Session: Group of subjects doing the experiment at the same time One session with 55 students
  31. 31. Ordinary Goods Subjects with high SSNs pay more Arbitrariness Coherence: Subjects pay more for better goods Cordless trackball < Cordless keyboard Average wine < Rare wine Last digits SSN Cordless Trackball Cordless Keyboard Average Wine Rare Wine 01-20 $8.64 $16.09 $8.64 $11.73 41-60 $13.45 $29.27 $12.55 $18.09 81-100 $26.18 $55.64 $27.91 $37.55
  32. 32. Novel Goods Subjects listen to annoying sounds for 30 seconds Hypothetical question asking whether they are willing to listed to the sound for 300 seconds for a payment equal to the anchor Anchor: First 3 digits of their SSN Elicit their willingness to accept (WTA) “X” seconds of the sound Research Question: Design: How do we form preferences of goods we have not consumed? Is there a stable valuation of hedonic experiences (pleasure or pain)? Ascending x=100, 300, 600 Descending x=600, 300, 100
  33. 33. Novel Goods High, middle, low values of “X” Treatment Variables: Between-subjects treatment variables: + Ascending or descending sequences of “X”+ Within-subjects treatment variables: Session: One session with 90 students High and low anchors (above or below the median)+
  34. 34. Novel Goods Subjects willingness to accept is lower for low anchors Arbitrariness Coherence: Willingness to accept increases with duration If subjects have little idea about how to price initially, and hence rely on the random anchor in com FIGURE III Mean WTA (in Dollars) for the Three Annoying Soun The data are plotted separately for subjects whose three-digit an the median (low anchor) and above the median (high anchor). Erro on standard errors.
  35. 35. Coherence Arbitrariness Valuations are highly sensitive to arbitrary anchor values Summary For all goods? After an initial valuation, choices are coherent Initial choices exert a large effect on subsequent choices
  36. 36. Back to experimental design Partners: always play with same group+ More Jargon Matching Procedures: way of grouping subjects in repeated games Strangers: randomly rematched before playing each game+ Absolute Strangers: Subjects do not play with the same subject more than once + Incentive Compatible: Monetary incentives are aligned with the variable of interest (it doesn’t pay to lie)
  37. 37. The Experimental Method Theory testing/selection+ Goals for an experiment Search for empirical regularities+ Advice policy makers+
  38. 38. The Experimental Method Lack of realism+ Some objections: Representativeness of subjects+
  39. 39. Can lower costs+ Deception Easier to study rare situations (Milgram-authority obedience)+ Advantages Easier to design experiments+ Lost of control of+ Disadvantages Subjects don’t believe the instructions Subjects try to outguess the experimenter Experimental Method
  40. 40. Checklist Rational actors have preferences that allow them to choose best RCT makes predictions that can be tested experimentally Experimental studies in social sciences have a specific theory-based structure
  41. 41. Questions?