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Summary The Psychology of Economic Behavior
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The psychology of economic behaviorStudy for similarities and differences between articles!
Meeting 1: Thinking like an economist
Intro: Thinking like an economist; micro economics
Micro economics = Theories of how individual decision makers, like consumers, makes their
decisions.
Adam Smith
'Wealth of Nations'
• Rational Economic Man = A person who only thinks about himself and always tries to do the best
for himself. If we all do that, it’s the perfect world.
• The invisible hand = Market mechanism. Doesn’t matter how much individual purse self-interest,
eventually will always improve collective interest. For example the labor market. People who don’t
have work, want to work for a low salary. The companies get the chance to give more people work,
because of the low salary. The market mechanism will be that at a lower weight, nobody will be
unemployed anymore because labor becomes cheap. This doesn’t work.
Carl Menger
‘Grundsätze’
• Utility = Subjective, not the same for everyone. Maybe you are thirty and want to drink, but
another person is not thirty so don’t want to drink. The same product has higher utility for me than in
other settings.
• Motives
First demand is food, when you are satisfied to some extent. You are going to think about another
level: tobacco.
Micro-economics
The rational consumer:
Economic theory is built on a series of assumptions:
• preferences
• income
• prizes
Preferences: indifference curves
The general assumption then is that decision-makers have stable preferences for CDs and books.
These preferences can be mapped graphically in indifference curves. Such an indifference curve
depicts all combinations of goods (here books and CDs) that are equally attractive to the decision-
maker.
The shape of the graph is always the same. How it exactly runs is different for each other.
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,Properties indifference curve:
1. Away from O: Higher utility
2. Negative slope: Substitution
3. Convex to O: The more X you have, the less value you put on increasing X (the less of Y you want to
give up for that)
E.g. Thus, you are prepared to give up more books in order to increase your CD collection from 5 to
10 CDs than you would be to increase your CD selection from 5000 to 5005 CDs.
Each curve combines combinations that are equality attractive to the decision-maker (i.e., that have
equal utility). And here we can demonstrate an additional assumption that can be referred to
as the “more is better” assumption, or as the “axiom of greed”, which simply states that – other
things equal – more of a good is preferred to less. As a consequence of this we always want to reach
for the highest indifference curve.
Budget line
= What can you buy? Everything beyond the green line you can’t afford.
Maximize
Rational Economic Man we won’t see him in reality
• information
• maximizing
• self-interest (greed)
• stable preferences
• no emotions
2
,Greed
(Maximizing vs.) Greed
Greed: Vs. Maximizing
Greed was associated with more impulsiveness, while maximization was not. This makes sense;
if a decision maker wants to maximize, impulsivity does not come in handy. Maximization is
characterized by the motivation to make the best possible decision (Schwartz et al., 2002).
Greedy people do not maximize, they just want more of things; and then impulsivity may prove its
worth.
Vs. Materialism
Most closely related to greed. In both cases increased desire to acquire possessions.
Vs. Self-interest
Greed and self-interest results in people wanting more for themselves. Difference: greed is unrelated
to the outcomes of others because people only focus on their own need to acquire more.
Vs. Envy
Greed and envy both reflect dissatisfaction with one’s current state, and the motivation to act on
that dissatisfaction. A clear difference between the two is the intrinsically social nature of envy. Envy
comprises an upward social comparison. Greed in its pure form is individualistic.
Vs …
Greed =
Always want more and never being satisfied with what one currently has.
- E.g. Black Friday
- Eating more than it is good for you.
Dispositional greed
1. I always want more.
2. Actually I am kind of greedy.
3. One can never have too much money.
4. As soon as I have acquired something. I start to think about the next thing I want.
5. It doesn’t matter how much I have. I’m never completely satisfied.
6. My life motto is “more is better”.
7. I can’t imagine having too many things.
Who are the greedy? (Study 1)
LISS Panel
Representative of the Dutch population
N = 5344
The older you get, the lower you
score on dispositional greed.
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, What do they do? (Study 3-5)
Study 3: Lower donations in Dictator Game
Dictator Game = 2 People are involved, the dictator can distribute a certain amount of money
for example 10 euros. The recipient is powerless. If you are the dictator, and score high on
greed you give less to the other. It means that the scale is related to behavior.
Study 4: Lower donations in Ultimatum Game
More often reject low offers
Ultimatum game = About bargaining, involves 2 people, involves distribution of money.
Person A does an offer, person B can accept or reject it. If you don’t accept the offer, both
player get nothing. In this case, people who score high on greed and has the person B reject
low offers.
Study 5: Less cooperative in a resource dilemma
Resource dilemma = With more people. Common resource like energy. How cooperative are
people? Do they take a lot of common resource ? Yes, greedy people take a lot and hurt the
collective interest.
A follow-up study…
People who score higher on greed, earn more money. Same people also had higher expenses (bought
more) and less savings. The more greedy you are, the more indeb (not positive).
Young people and men are more greedy then their counterparts.
Dealing with information
Choice overload Iyengar & Lepper (2000)
= Too much choice.
Draeger’s Supermarket, Menlo Park, Ca
• 250 varieties of mustard
• 75 varieties olive oil
• > 300 varieties jam
Experiment 1
Initially desirable: Buy:
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