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Behavioural Economics2017-2018
Tutorial Week 1: Introduction
Reading:
Robson, A.J. (2002) Evolution and human nature. Journal of Economic Perspectives 16: 89–
106. Skip the section “Utility as Adaptive in the Long Run”
1. What three characteristics do human beings have from the perspective of decision
making? How is rationality defined in relation to these characteristics? Preferences, beliefs
and rationality. Beliefs are the probabilities with which people think various outcomes will
occur, conditional on the information that might be available. Preferences are the rankings over
the set of gambles that are based on such beliefs over the outcomes. Rationality is the extent to
which people succeed in choosing optimal actions in the light of their beliefs and preferences
and the extent to which their beliefs are appropriately modified by their information.
2. What type of restrictions do economists impose on preferences, and on rationality?
Preferences are taken to be transitive and sometimes exogenous and unchanging. Rationality in
economic models usually entails the exact optimization of preferences and modification of
beliefs in accordance with Bayes` theorem.
3. Define time inconsistency by means of an example. A person might prefer to receive $105
a year and a day from now instead of $100 a year from now, but that same person might prefer
to receive $100 today rather than $105 tomorrow.
4. Why does the unified evolutionary treatment of the paper focus on hunter-gatherer
societies? Because some such societies characterises all two million years of human history. It
provides a basis for assessing the importance of empirical anomalies. In some cases it provides
a strong support for a standard economic theory of individual behaviour and in other cases it
may suggest alternative unexpected directions.
5. According to Robson, what is the key advantage of standard economic theory over other
social sciences? How can the evolutionary approach proposed maintain this advantage?
The key advantage that standard economic theory has over other social sciences is that of being
based on an overarching theory. The evolutionary approach helps to maintain constraints on
economic theory.
6. What is the meaning of biological fitness? Closely linked to the number of offsprings you
have. Biological fitness is how fit you are to survive on the planet. The theory of survival of the
fittest.
7. Explain the link between evolutionary biology, and the principal-agent problem. Here
“nature” is the principal and the individual is the agent. So when “nature wishes” the individual
to maximise biological fitness, this is shorthand for claiming that individuals who maximise
biological fitness will dominate the population. Nature may well be “better informed” than are
individuals about some aspects of biological fitness. However, individuals may well have better
information about local circumstances.
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,8. How does Robson justify that he focuses on individual fitness? The biological evolution
has encouraged fitness of the individuals rather than fitness at any higher or lower level. There
are often ways to reap the social gains from cooperation without creating a conflict with the
interest of the individual. And since the individual approach seems consistent with the usual
stance in economics that individuals are selfish, this alternative also seems the likeliest to
conserve existing economic theory.
9. How can gene selection (as opposed to individual selection) explain altruism? Genes can
be detrimental to the interest of the individual. A large number of genes is likely to influence
in a complex way any economically significant behaviour.
10. If what matters biologically is having a large number of viable offspring, why does it
not suffice for our survival that our preferences are only defined over offspring? Why do
we have preferences over consumption goods, which may be considered as intermediate
goods in producing offspring? Such ranking of consumption goods, rather than ranking over
offspring, is optimal since Nature knows more about the connection of consumption to
offspring than any human. Because individuals see only a small sample, requiring them to learn
what consumption choices lead to more offspring will be less effective than having them adhere
to the ranking of these choices set by nature.
11. Why would we have utility functions? Why is it not simply wired in us how we should
rank any two given consumption bundles? It may outperform some of the obvious
alternatives. Because the cost of assigning utility to a bundle and comparing the utilities and
choose the appropriate bundle is lower than the cost of reviewing each such pair. Since the
number of pairs grows more quickly than the number of bundles, as the number of bundles
increases, it follows that the cost of this alternative also grows more quickly than the number
of bundles.
12. Explain Rogers’ (1994) evolutionary explanation of impatience (p.94). He says that the
offsprings of the daughter are only half-relatives under sexual reproduction and therefore the
mother values the offspring of there daughter at only one-half the value of her own offspring.
Another evolutionary argument bearing on impatience concerns whether, when other thing are
equal, an individual would prefer tot have children earlier of later. Given that each individual
will have more than one offspring on average, a faster rate of growth can be achieved by having
these offsprings sooner (those types who have children younger will tend to dominate the
population over time).
13. Evolution may provide a rationale for why individuals are more risk averse with
respect to collective risks, than with respect to individual risk. Explain. What matters
biologically is not absolute success in producing offspring, but relative success to other types.
So individuals are more likely to take a risk to benefit from themselves (producing more
offspring than others) than taking a risk which everyone can benefit from (everyone producing
more offsprings). An evolutionary perspective suggest a direction for extending the standard
economic perspective on uncertainty.
14. How does Robson evolutionarily explain the fact that a middle-class person A in a rich
country may be unhappier than a rich person B in a poor country, even though person A
is richer than person B? People tend to measure their happiness according to others.
Individuals are possessing happiness as a utility on relative and local scale. The threshold values
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, and utility should adapt to the choice environment. Utility should adapt so that only the choice
that must made in each environment are dealt with appropriately.
15. Why, according to Robson, would nature have favoured fixed preferences, but
variable beliefs in humans? Because in the case of preferences (consumption on utility)
Nature has better information and therefore it is better if preferences are fixed by Nature. While
in beliefs the individual may have better information and therefore Nature should allow to have
flexible and variable beliefs.
16. Shortly discuss the two main hypotheses for the evolution of human intelligence. How
could one test these hypotheses against each other? (1) “ecological hypothesis”; the impetus
came from interaction with the nonhuman environment, for example the need to obtain food
and avoid predators. (2) “social intelligence”; strategic interactions with other humans provided
the key impetus towards greater intelligence. An insistence on theoretical generality and
attention to anthropological observations on hunter-gatherer societies will help to discriminate
among such explanations.
17. Summarize the critique of Camerer and Loewenstein (2004) (see literature of the
lectures) of the evolutionary approach. What, according to these authors, is the
fundamental difference between the methodology of standard behavioural economics, and
the methodology as proposed by Robson? The evolutionary theory of Robson does not try to
add extra variables for explanations, but looks how anomalies are formed from an evolutionary
view.
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