Individual behavior can be described using rational choice theory, which assumes that decision-makers choose options that best satisfy their preferences given constraints and beliefs. However, some empirical findings show ways in which social preferences modify this model of purely rational action. The document discusses experiments conducted in social sciences to understand individual decision-making and how aggregate social outcomes emerge from individual interactions. Specifically, it summarizes experiments that show how arbitrary values like random numbers can influence preferences and valuations, even for goods people have no experience with. The findings suggest preferences are initially sensitive to anchors but become more coherent with experience.

1. Block 2
Individual Behavior

2. To describe the model of
rational action
To understand some empirical
findings that modify the theory:
social preferences
Aim of Block 2

3. Rational
.
Choice
.
Theory
LECTURE 4

4. To understand what rational
action implies
To understand the design of
experimental studies in social
sciences
Aim Lecture 4

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. Central Assumption
Rational Choice Theory
Decision-makers have logically consistent goals
(whatever they are), and, given these goals, choose the
best available option.

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. Core Elements
Rational Choice Model
Preferences
Constraints
Beliefs
Optimal
Decision
Outcome
(Prediction):
Equilibrium
Decision Theory
Social
Interactions

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. Utility Maximization
Choose a feasible option that best
satisfies the individual’s preferences
Individuals

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. Sociology
Social outcomes of the interaction
of individuals
Interested in:
Social outcomes from the Equilibrium perspective

13. Equilibrium Analysis
Economics
Biology
Non-Life related sciences
Common to other fields

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. 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. 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. 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. 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. This is widely studied
*But first a practical*
In laboratory experiments

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. Experimental
Studies
Social Sciences
in

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. 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. 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. 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. Structure Experiment
Research Question
Design
Treatment Variables
Session
.
.
.

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. The Experimental
Method
Theory testing/selection+
Goals for an experiment
Search for empirical regularities+
Advice policy makers+

38. The Experimental
Method
Lack of realism+
Some objections:
Representativeness of subjects+

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. 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. Questions?