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Economic Organizations,
Institutions... and Markets
Professor. Joan Tubau
Q: Why are you studying economics?
Comparative advantage (rationality?)
Q: Why are you doing in the UPF?
Knowledge, signalling, agenda... and consumption good
Q: Do you think you are rational?
If the answer is 'yes', think again
Q: Do you believe in the invisible hand?
Sub-optimal decisions & market failures
Q: How would you define economics?
2nd year student already... come on!
The economic problem: How to manage scarcity
Limited resources + Unlimited human wants
Q: How to allocate resources efficiently?
Prices = Information
Def. of rationality: To act according to your preferences
Yes, but... emotional decisions + asymmetric information
Choice architecture: Default & path of least resistance
I don't need all the things I think I need. Black Friday
System 1 / System 2. Optimal equilibrium? Not 0 / 100
Taleb vs. Thaler. Some unpredictability may be effective
Week 1. Rethinking thinking
Week 2. Human nature and institutional analysis
Week 3. How hardwired is human behavior? / Homo administrans
Week 4. Psychological foundations of incentives
Week 5. Discover your inner economist / Nature, purpose of the firm
Week 6. Specific knowledge & divisional performance measurement
Week 7. Market for public services / The use of knowledge in society
Week 8. Microeconomics and behavior / The problem of social cost
Week 9. Institutions in the contractual process
Week 10. Increase profits / The good company / Economic efficiency
Evolutionary psychology
Theory 1: Time frame. Evolutionary explanation?
Saving for retirement. Thaler, future discount rate
Student's trade-off: Aigües or Opium
Marshmallow, the return from delaying gratification
Theory 2: Overconfidence. Evolutionary explanation?
Do you think you can drive better than the average? (93%)
Human mating. Sex differences—biological and cultural
Sexual disgust. Those who tell the stories will rule society
Arbitrary standard of beauty
Nonarbitrary standard of beauty
Theory 3: Risk management. Evolutionary explanation?
Are you afraid of snakes? Propensity for false positives
.
' , ,
.
, , : “ 2004 2008
. . .
' . :
' ,
. . '
.”
Nassim Nicholas Taleb
Psychological price. Some prefer to be wrong with the pack
Are you confortable thinking/acting alone? Adults > Teens
Theory 4: Gossip. Evolutionary explanation?
Not politically correct but, who is better at it?
Not issue #1. FB social problem? Happiness by comparison
Prefrontal cortex, social control. I don't need a corner office
Theory 5: Status seekers. Evolutionary explanation?
If speed limit is 120, why people pay 300K EUR for a car?
3 	 	 1
Where / What would you study if you had to sign a ...
... non-disclosure clause—but retained the knowledge?
T1. New cognitive perspectives
Briefing
Biology-culture interconnection. Maladapted or ecological brain?
Instinctive cooperation. Love, justice and the concept of fairness
Mr. Hyde, an excellent team player. Unless you can't control him
Institutions too. Religion, state and (the most important!) family
Why having a God was efficient for scaling up human societies?
2 levels: Social norms & bad behavior, intra-group cooperation
Satoshi Kanazawa: ‘I only explain nature.
I do not tell people what to do or not to do’
Heuristics, shortcuts
Stone Age software. Environment not keeping pace with biology
Inf. processor designed by natural selection. Optical illusions
Sacrifice for the greater good. ‘A man provides’ Gus Fring
I am goal-oriented. An economic system, better than a machine
Not maximizing happiness but survival odds... 5.000 years ago!
Pleasure vanishes so I keep pursuing it. Kill off craving, desire
Think twice, it's not all right
S1: Intuition, heuristics, fast. S2: Consciousness, internal, slow
Old wisdom. Cool it off, sleep on it, count to 10 before acting
Don’t believe everything you think. Do you need regulation?
Risk allocation. Not visiting Paris... but texting while driving
Illusion of understanding. Reinforcing previous views, Civil War
Rationalization. You’ll build a narrative that fits your behavior
The strange rationality of System 1
Emotions pull the trigger. Introduce greater ex ante rationality
Sully’s indecision. The flâneur scenario, to maximize optionality
Business lessons from the mafia. Retaliation, no matter the cost
Obey chain of command. Fight back (harder!) when equal rank
Street-smart skills. Mobsters can display a sense of honor
Business problems are communication problems. Cut the bullshit
Paper 001. Rethinking thinking
Tricks from real estate brokers: Anchor, relativity & loss aversion
Mental accounting—holiday mindset. 4 EUR for an ice-cream?
Why keep playing the lottery? Sapiens... visualizing the odds
Framing. Decisions influenced by how choices are presented
Endowment, be careful with your first one! Even among babies
Decision-making may not be the #1 issue. How to train curiosity
Imperfect humans
Hindsight. Economists have predicted 9 of the last 5 recessions
Losing a train for 2 minutes or 20 minutes. 1x2x3x4x5x6x7x8x9
Modular mind, choosing a program. Also, ex ante formal process
No justification but... lower punishment for emotional crimes
15 MAD for a bottle of water? Reserve price changes over time
Yet, I am happy to be intuitive. Non-fatal decisions, corrections
‘I hate to lose more than I love to win’
Social animals
Students' categorization. Decision-making to save time & energy
Language as an instinct. Children in orphanages, no stimulation
Before legislation. Social ostracism regulated individual behavior
Retaliation, tic for tat strategy. Deterrence in irrational violence
Reciprocal altruism, nepotism. Laws restricting sexual behavior
Regarding this issue, 20th Century social norm is changing now
Proportion of cooperators = h
Expected outcome for cooperators = 4h + 0 (1-h) = 4h
Expected outcome for defectors = 6 h + 2 (1-h) = 2 + 4h
Cooperator Defector
Cooperator
4 6
4 0
Defector
0 2
6 2
Average payoffs when cooperators are identifiable, no cost
Average payoffs when cooperators and defectors look alike
Average payoffs when cooperators are identifiable, cost = 1
Ariely on relationships
Investments, this isn't a zero-sum game. Careful with sunk cost
Expectations are always too high. Paying more for external CEOs
College roommates. American version of arranged marriages
All happy families. When to marry? Not too early, not too late
Tinder vs. Meetic. Asymmetric information and adverse selection
Real dating, 2-week vacation from the start. Conflict resolution
Amos Tversky: 'People are not so complicated.
Relationships between people are complicated'
More on rationality
Interests best served by 1. Yet, I feel irresistibly attracted by 2
Self-awareness and ex ante anticipation. Kahneman's guidelines
Institutional control. Wedding vows, socio-economic punishment
Willpower. Public commitments better than New Year’s resolution
Expectations shape experiences. $$$ wine tastes better, really
Authenticity and exclusivity. Scarcity marketing... loss aversion
New Year's resolutions
Deadlines, be accountable if not delivered on time. Tell everyone
Skin in the game incentives, expensive skinny jeans. stickk.com
Remove options. Pension fund (rational model?), Hernán Cortés
Partner, mutual surveillance. By comparison, Alcoholics Anonym.
Do not try to fight procrastination! Natural self-control: Gratitude
Childrens' toothbrush, create an habit. Ironically, from willpower
Paper 002. Human nature and institutional analysis
Sexual selection: Emotions before reason, risk-aversion, etc.
Role of institutions is to fill the gap. Don't just think politics
Moral sentiments appear to help solve impulse-control problems
K misconceptions. Religion (interest rates), democracy (wealth)
How to control these instincts? Cultural differences, honor code
Tax reform in Italy... they go with gas, not labor. Sydney Metro
Sexual selection + Survival of the fittest
& Group selection
Paper 002. Human nature and institutional analysis
Role of institutions is to fill the gap. Don't just think politics
Moral sentiments appear to help solve impulse-control problems
Social memory in rural towns. Society against free rider, Ostrom
K misconceptions. Religion (interest rates), democracy (wealth)
How to control these instincts? Cultural differences, honor code
Tax reform in Italy... they go with gas, not labor. Sydney Metro
Business implications of evolutionary psychology
How organizations should be designed? Utopian flat structures
Managers show empathy, toughness. Nature/nurture interaction
Marketers understand human fears, motivations. Pompeu Farra?
Money can kill intrinsic motivation. Bring a bottle of wine!
Planning fallacy, over-optimism. Is the worst-case bad enough?
Ultimatium game. Not caused by future expectations of trade
My summer in Australia
The rational choice model. Trolley ticket cost-benefit analysis
Petty theft… everyone’s doing it. Morality should be included
Optimal enforcement according to the asymm. value function
Behavior. No early payment discount in Sydney’s traffic tickets
We expect some flexibility. easyJet (BCN) vs. Jetstar (Cairns)
Plagiarism in UPF, future tax avoiders. Do we punish socially?
Happiness / Money
Happiness does not last. Again, any ev. explanation?
It's about opportunity cost: Short-term / Long-term
‘You’re happy because you’re successful, but what is
happiness? It’s a moment before you need more happiness’
The goal: To maximize happiness within the constraint
But first, how do you define it? Purpose? Satisfaction?
Money cannot buy happiness
Money can buy happiness
$
'Do not compete with anyone in any of your pursuits' Taleb
Hedonic treadmill. In rich countries, endless choices
Purchase experiences, not goods. Don't save before 30
Ariely's concern: How easy is to spend money today... distance
Marginal utility of money. Life is a trade-off ($ / time)
What are you giving up to reach the top? Is it worth it?
Marketing
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions
Behavioral Economics & Institutions

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Behavioral Economics & Institutions

  • 1. Economic Organizations, Institutions... and Markets Professor. Joan Tubau
  • 2. Q: Why are you studying economics? Comparative advantage (rationality?)
  • 3. Q: Why are you doing in the UPF? Knowledge, signalling, agenda... and consumption good
  • 4. Q: Do you think you are rational? If the answer is 'yes', think again
  • 5. Q: Do you believe in the invisible hand? Sub-optimal decisions & market failures
  • 6. Q: How would you define economics? 2nd year student already... come on!
  • 7.
  • 8. The economic problem: How to manage scarcity Limited resources + Unlimited human wants
  • 9.
  • 10. Q: How to allocate resources efficiently? Prices = Information
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  • 13. Def. of rationality: To act according to your preferences Yes, but... emotional decisions + asymmetric information
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  • 16. Choice architecture: Default & path of least resistance I don't need all the things I think I need. Black Friday
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  • 18. System 1 / System 2. Optimal equilibrium? Not 0 / 100 Taleb vs. Thaler. Some unpredictability may be effective
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  • 21. Week 1. Rethinking thinking Week 2. Human nature and institutional analysis Week 3. How hardwired is human behavior? / Homo administrans Week 4. Psychological foundations of incentives Week 5. Discover your inner economist / Nature, purpose of the firm Week 6. Specific knowledge & divisional performance measurement Week 7. Market for public services / The use of knowledge in society Week 8. Microeconomics and behavior / The problem of social cost Week 9. Institutions in the contractual process Week 10. Increase profits / The good company / Economic efficiency
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  • 36. Theory 1: Time frame. Evolutionary explanation? Saving for retirement. Thaler, future discount rate
  • 37.
  • 38. Student's trade-off: Aigües or Opium Marshmallow, the return from delaying gratification
  • 39.
  • 40. Theory 2: Overconfidence. Evolutionary explanation? Do you think you can drive better than the average? (93%)
  • 41.
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  • 44. Human mating. Sex differences—biological and cultural Sexual disgust. Those who tell the stories will rule society
  • 47.
  • 48. Theory 3: Risk management. Evolutionary explanation? Are you afraid of snakes? Propensity for false positives
  • 49.
  • 50. . ' , , . , , : “ 2004 2008 . . . ' . : ' , . . ' .” Nassim Nicholas Taleb
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  • 55. Psychological price. Some prefer to be wrong with the pack Are you confortable thinking/acting alone? Adults > Teens
  • 56.
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  • 59. Theory 4: Gossip. Evolutionary explanation? Not politically correct but, who is better at it?
  • 60.
  • 61. Not issue #1. FB social problem? Happiness by comparison Prefrontal cortex, social control. I don't need a corner office
  • 62.
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  • 64. Theory 5: Status seekers. Evolutionary explanation? If speed limit is 120, why people pay 300K EUR for a car?
  • 65.
  • 66. 3 1
  • 67. Where / What would you study if you had to sign a ... ... non-disclosure clause—but retained the knowledge?
  • 68.
  • 69. T1. New cognitive perspectives
  • 70.
  • 71. Briefing Biology-culture interconnection. Maladapted or ecological brain? Instinctive cooperation. Love, justice and the concept of fairness Mr. Hyde, an excellent team player. Unless you can't control him Institutions too. Religion, state and (the most important!) family Why having a God was efficient for scaling up human societies? 2 levels: Social norms & bad behavior, intra-group cooperation
  • 72.
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  • 77. Satoshi Kanazawa: ‘I only explain nature. I do not tell people what to do or not to do’
  • 78.
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  • 80.
  • 81. Heuristics, shortcuts Stone Age software. Environment not keeping pace with biology Inf. processor designed by natural selection. Optical illusions Sacrifice for the greater good. ‘A man provides’ Gus Fring I am goal-oriented. An economic system, better than a machine Not maximizing happiness but survival odds... 5.000 years ago! Pleasure vanishes so I keep pursuing it. Kill off craving, desire
  • 82.
  • 83.
  • 84.
  • 85.
  • 86. Think twice, it's not all right S1: Intuition, heuristics, fast. S2: Consciousness, internal, slow Old wisdom. Cool it off, sleep on it, count to 10 before acting Don’t believe everything you think. Do you need regulation? Risk allocation. Not visiting Paris... but texting while driving Illusion of understanding. Reinforcing previous views, Civil War Rationalization. You’ll build a narrative that fits your behavior
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  • 97. The strange rationality of System 1 Emotions pull the trigger. Introduce greater ex ante rationality Sully’s indecision. The flâneur scenario, to maximize optionality Business lessons from the mafia. Retaliation, no matter the cost Obey chain of command. Fight back (harder!) when equal rank Street-smart skills. Mobsters can display a sense of honor Business problems are communication problems. Cut the bullshit
  • 98.
  • 99.
  • 100. Paper 001. Rethinking thinking Tricks from real estate brokers: Anchor, relativity & loss aversion Mental accounting—holiday mindset. 4 EUR for an ice-cream? Why keep playing the lottery? Sapiens... visualizing the odds Framing. Decisions influenced by how choices are presented Endowment, be careful with your first one! Even among babies Decision-making may not be the #1 issue. How to train curiosity
  • 101.
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  • 107. Imperfect humans Hindsight. Economists have predicted 9 of the last 5 recessions Losing a train for 2 minutes or 20 minutes. 1x2x3x4x5x6x7x8x9 Modular mind, choosing a program. Also, ex ante formal process No justification but... lower punishment for emotional crimes 15 MAD for a bottle of water? Reserve price changes over time Yet, I am happy to be intuitive. Non-fatal decisions, corrections
  • 108. ‘I hate to lose more than I love to win’
  • 109.
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  • 111.
  • 112. Social animals Students' categorization. Decision-making to save time & energy Language as an instinct. Children in orphanages, no stimulation Before legislation. Social ostracism regulated individual behavior Retaliation, tic for tat strategy. Deterrence in irrational violence Reciprocal altruism, nepotism. Laws restricting sexual behavior Regarding this issue, 20th Century social norm is changing now
  • 113.
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  • 116. Proportion of cooperators = h Expected outcome for cooperators = 4h + 0 (1-h) = 4h Expected outcome for defectors = 6 h + 2 (1-h) = 2 + 4h Cooperator Defector Cooperator 4 6 4 0 Defector 0 2 6 2
  • 117. Average payoffs when cooperators are identifiable, no cost
  • 118. Average payoffs when cooperators and defectors look alike
  • 119. Average payoffs when cooperators are identifiable, cost = 1
  • 120. Ariely on relationships Investments, this isn't a zero-sum game. Careful with sunk cost Expectations are always too high. Paying more for external CEOs College roommates. American version of arranged marriages All happy families. When to marry? Not too early, not too late Tinder vs. Meetic. Asymmetric information and adverse selection Real dating, 2-week vacation from the start. Conflict resolution
  • 121.
  • 122. Amos Tversky: 'People are not so complicated. Relationships between people are complicated'
  • 123.
  • 124.
  • 125.
  • 126. More on rationality Interests best served by 1. Yet, I feel irresistibly attracted by 2 Self-awareness and ex ante anticipation. Kahneman's guidelines Institutional control. Wedding vows, socio-economic punishment Willpower. Public commitments better than New Year’s resolution Expectations shape experiences. $$$ wine tastes better, really Authenticity and exclusivity. Scarcity marketing... loss aversion
  • 127.
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  • 131. New Year's resolutions Deadlines, be accountable if not delivered on time. Tell everyone Skin in the game incentives, expensive skinny jeans. stickk.com Remove options. Pension fund (rational model?), Hernán Cortés Partner, mutual surveillance. By comparison, Alcoholics Anonym. Do not try to fight procrastination! Natural self-control: Gratitude Childrens' toothbrush, create an habit. Ironically, from willpower
  • 132.
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  • 136. Paper 002. Human nature and institutional analysis Sexual selection: Emotions before reason, risk-aversion, etc. Role of institutions is to fill the gap. Don't just think politics Moral sentiments appear to help solve impulse-control problems K misconceptions. Religion (interest rates), democracy (wealth) How to control these instincts? Cultural differences, honor code Tax reform in Italy... they go with gas, not labor. Sydney Metro
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  • 146. Sexual selection + Survival of the fittest & Group selection
  • 147.
  • 148. Paper 002. Human nature and institutional analysis Role of institutions is to fill the gap. Don't just think politics Moral sentiments appear to help solve impulse-control problems Social memory in rural towns. Society against free rider, Ostrom K misconceptions. Religion (interest rates), democracy (wealth) How to control these instincts? Cultural differences, honor code Tax reform in Italy... they go with gas, not labor. Sydney Metro
  • 149.
  • 150. Business implications of evolutionary psychology How organizations should be designed? Utopian flat structures Managers show empathy, toughness. Nature/nurture interaction Marketers understand human fears, motivations. Pompeu Farra? Money can kill intrinsic motivation. Bring a bottle of wine! Planning fallacy, over-optimism. Is the worst-case bad enough? Ultimatium game. Not caused by future expectations of trade
  • 151.
  • 152.
  • 153. My summer in Australia The rational choice model. Trolley ticket cost-benefit analysis Petty theft… everyone’s doing it. Morality should be included Optimal enforcement according to the asymm. value function Behavior. No early payment discount in Sydney’s traffic tickets We expect some flexibility. easyJet (BCN) vs. Jetstar (Cairns) Plagiarism in UPF, future tax avoiders. Do we punish socially?
  • 154.
  • 156.
  • 157. Happiness does not last. Again, any ev. explanation? It's about opportunity cost: Short-term / Long-term
  • 158.
  • 159. ‘You’re happy because you’re successful, but what is happiness? It’s a moment before you need more happiness’
  • 160.
  • 161. The goal: To maximize happiness within the constraint But first, how do you define it? Purpose? Satisfaction?
  • 162. Money cannot buy happiness
  • 163. Money can buy happiness
  • 164. $ 'Do not compete with anyone in any of your pursuits' Taleb Hedonic treadmill. In rich countries, endless choices Purchase experiences, not goods. Don't save before 30 Ariely's concern: How easy is to spend money today... distance Marginal utility of money. Life is a trade-off ($ / time) What are you giving up to reach the top? Is it worth it?
  • 165.
  • 166.