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Summary lectures and articles Economic Psychology 2019
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Summary of all the articles and lectures from the major/minor course Economic Psychology at Tilburg University
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Overview Articles- Edwards, W. (1954). The theory of decision making. Psychological Bulletin, 51, 380-417
- Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American Psychologist, 39, 341-
350.
- Thaler, R. H. (1985). Mental accounting and consumer choice. Marketing Science, 4, 199–214.
- Loewenstein, G., & Thaler, R. H. (1989). Intertemporal choice. Journal of Economic Perspectives,3,
181-193.
- Shafir, E., Simonson, I., & Tversky, A. (1993). Reason-based choice. Cognition, 49, 11-36.
- Mellers, B. A., Schwartz, A., & Ritov, I. (1999). Emotion-based choice. Journal of Experimental
Psychology: General, 128, 1–14.
- Zeelenberg, M., Breugelmans, S. M., & De Hooge, I. E. (2012). Moral sentiments: A behavioral
economics approach.
- In: A. Innocentie, & A. Sirigu (Eds.). Neuroscience and The Economics of Decision Making (pp. 73-
85). New York: Routledge.
- Van Lange, P. A. (2000). Beyond self-interest: A set of propositions relevant to interpersonal
orientations. European Review of Social Psychology, 11, 297-331.
- Eriksson, K., Vartanova, I., Strimling, P., & Simpson, B. (2018). Generosity pays: Selfish people have
fewer children and earn less money. Journal of Personality and Social Psychology. Advance online
publication. http://dx.doi.org/10.1037/pspp0000213
- Frank, R. H., Gilovich, T., & Regan, D. T. (1993). Does studying economics inhibit cooperation?
Journal of Economic Perspectives, 7, 159-171.
- Kahneman, D., Knetsch, J. K., Thaler, R. H. (1986). Fairness and the assumptions of
economics. Journal of Business, 59, s285-s300.
- Camerer, C. (1999). Behavioral economics: Reunifying psychology and economics. PNAS, 96,
10575-10577.
- Kahneman, D. (2003). A psychological perspective on economics. American Economic Review, 93,
162-168
- Ariely, D., & Norton, M. I. (2007). Psychology and experimental economics: A gap in abstraction.
Current Directions in Psychological Science, 16, 336-339.
- Schwartz, B., Ward, A., Monterosso, J., Lyubomirsky, S., White, K., & Lehman, D. R. (2002).
Maximizing versus satisficing: Happiness is a matter of choice. Journal of Personality and Social
Psychology, 83, 1178–1197.
- Seuntjens, T. G., Zeelenberg, M., Van de Ven, N., & Breugelmans, S. M., (2015). Dispositional
greed. Journal of Personality and Social Psychology, 108, 917-933.
- Mazar, N., Amir, O., & Ariely, D. (2008). The dishonesty of honest people: A theory of self-concept
maintenance. Journal of Marketing Research, 45, 633–44.
- Shalvi, S., Dana, J., Handgraaf, M. J., & De Dreu, C. K. (2011). Justified ethicality: Observing desired
counterfactuals modifies ethical perceptions and behavior. Organizational Behavior and Human
Decision Processes, 115, 181-190.
- Cantarero, K., Szarota, P., Stamkou, E., Navas, M., & Dominguez Espinosa, A. D. C. (2018). When
is a lie acceptable? Work and private life lying acceptance depends on its beneficiary. Journal of
Social Psychology,158, 2, 220-235. doi: 10.1080/00224545.2017.1327404
- Cohn, A., Maréchal, M. A., Tannenbaum, D., & Zünd, C. (2019). Civic honesty across the globe.
Science, eaau8712. DOI: 10.1126/science.aau8712
- Mann, H., Garcia-Rada, X., Hornuf, L., Tafurt, J., & Ariely, D. (2016). Cut from the same cloth:
Similarly dishonest individuals across countries. Journal of Cross-Cultural Psychology, 47, 6, 858-874.
doi: 10.1177/0022022116648211
- Loewenstein, G. (1999). Experimental economics from the vantage-point of behavioural economics.
Economic Journal, 109, F25-F34.
- Thaler, R. H. (1986). The psychology and economics conference handbook: Comments on
Simon, on Einhorn and Hogarth, and on Tversky and Kahneman. Journal of Business Studies, 59,
,Summary Economic Psychology
Lecture 1: Introduction
Economic psychology: The study of how individuals affect the economy and how the economy
affects individuals. It is a better understanding of people behaving in their economic lives, and
explores the way economics issues in society affect peoples behavior.
The difficulty of psychology
Example of the escalators. People found out in warehouses that there were traffic on the stairs. So
they decided to make escalators so the people can climb faster to the other floor but instead of
climbing the escalators the people standing.
Nudge Theory
Nudge is a little push tot the right direction. Examples are a fly in the males toilet or the donor
registration.
Paper: The theory of decision making
It is assumed that the person who makes any decision to which the theory is applied is an economic
man. An economic man has three properties: He is completely informed, he is infinitely sensitive
and he is rational.
- Complete information: Economic man is assumed to know not only what all the courses of
action open to him are, but also what the outcome of any action will be.
- Infinite sensitivity: The alternatives available to an individual are continuous, infinitely
divisible functions, that prices are infinitely divisible, and that economic man is infinitely
sensitive.
- Rationality: The crucial fact about economic man is that he is rational. This means two things:
He can weakly order the states into which he can get, and he makes his choices so
as to maximize something. Two things are required in order for economic man to be able to
put all available states into a weak ordering:
- Preference: He must always be able to tell either that he prefers A to B, or that he prefers B
to A, or that he is indifferent between them.
- All preferences must be transitive. If economic man prefers A to B and B to C, then he
prefers A to C, so he is indifferent.
In the theory of risky choices, he is assumed to maximize expected utility. Economic man
always chooses the best alternative from among those open to him as he sees it.
The most useful thing to do with a theory is not to criticize its assumptions but rather to test it
theorems. If the theorems fit the data then theory has at least heuristic merit.
Early utility maximization theory
The theory of choice
The goal of human action is to seek pleasure and avoid pain. Every object or action may be
considered from the point of view of pleasure- or pain-giving properties. The goal of action then, is to
seek the maximum utility is the essence of the theory. This simple hedonism of the future is easily
translated in the theory of choice. These properties are called the utility of the object, and pleasure is
given by positive utility and pain by negative utility.
The use of utility theory was to establish the nature of the demand for various goods. On the
assumption that the utility of any good is a monotonically increasing negatively accelerated function of
the amount of that good, it is easy to show that the amounts of most goods which a consumer will buy
are decreasing functions of price, functions which are precisely specified once the shapes of the utility
curves are known.
The utilities of different commodities can be combined into a total utility by simple addition; this
amounts to assuming that the utilities of different goods are independent. Total utility was not
necessarily an additive function of the utilities attributable to separate commodities. In the process he
,introduced the notion of indifference curves, and thus began the gradual destruction of the classical
utility theory. An indifference curve is a constantly utility curve (bananas and apples).
Marginal utility
Fisher and Frisch have developed methods of measuring marginal utility (the change in utility with an
infinitesimal change in amount possessed) from market data, by making assumptions about the
interpersonal similarity of consumer tastes. Pareto hypothesized that utility is only measurable on
cardinal scale (A above B but not how much greater). In order to avoid unsatisfactory preference
structures, it is necessary to assume that consumers always have a complete weak ordering for all
commodity bundles, or points in commodity space. If the assumption about complete weak ordering of
bundles of commodities which was discussed above is made, then all the approaches are
mathematically equivalent. The indifference curve approach, in its various forms, has firmly
established itself as the structure of the theory of riskless choice
They assume that people behave rationally, that is, that they have transitive preferences and that they
choose in such a way as to maximize utility or expected utility.
The theory of risky choices
Almost everyone would agree that when I toss a coin the probability that I will get a head is .5. A
proposition about the future to which a number can be attached, a number that represents the
likelihood that the proposition is true, may be called a first-order risk.
For instance, I may decide that if I get a tail, I will put the coin back in my pocket, whereas if I get a
head, I will toss it again. Now, the probability of the proposition "I will get a head on my second toss" is
a function of two probability distributions, the distribution corresponding to the first toss and that
corresponding to the second toss. This might be called a second-order risk. Such propositions, like
do you drink a glass of beer after work are considered cases of uncertainty, rather than of risk.
Expected utility maximization in first order risks
The expected value of a bet is found by multiplying the value of each possible outcome by its
probability of occurrence and summing these products across all possible outcomes. In symbols:
EV=P1$1+P2$2+….+Pn$n. The assumption that people actually behave the way this mathematical
notion says they should is contradicted by observable behavior in many risky situations (people are
willing to buy lottery tickets even though the lottery makes a profit). The problem of insurance and the
St. Peters Paradox led Bernouilli propose that people act so as to maximize expected utility, rather
than expected value.
Economic implicaitons of maximaztion expected utility
Friedman and Savage , who were concerned with the question of why the same person who buys
insurance (with a negative expected money value), and therefore is willing to pay in order not to take
risks, will also buy lottery tickets (also with a negative expected money value) in which he pays in
order to take risks. They suggested that these facts could be reconciled by a doubly inflected utility
curve for money.
If / represents the person's current income, then he is clearly willing to accept
"fair" insurance (i.e., insurance with zero expected money value) because the
serious loss against which he is insuring would have a lower expected utility than
the certain loss of the insurance premium. Negatively accelerated total utility
curves, like that from the origin to /, are what you get when marginal utility
decreases; thus, decreasing marginal utility is consistent with the avoidance of
risks.) The person would also be willing to buy lottery tickets, since the expected
utility of the lottery ticket is greater than the certain loss of the cost of the ticket,
because of the rapid increase in the height of the utility function.
If the person's customary state of wealth changes, then the shape of his utility curve will thus remain
generally the same with respect to where he now is, and so his risk-taking behavior will remain pretty
much the same instead of changing with every change of wealth as in the Friedman- Savage
formulation.
, The theory of games
The theory of games offers no practical help in developing strategies, but it does offer rules about how
to choose among them In particular, the theory of games may be helpful in analyzing proper strategy
in games having random elements, like the shuffling of cards, or the throwing of dice. Associated with
strategies are imputations. An imputation is a set of payments made as a result of a game, one to
each player. In general, different imputations will be associated with different sets of strategies, but for
any given set of strategies there may be more than one imputation. A solution is a set of imputations,
none of which dominates another, such that every imputation outside the solution is dominated by at
least one imputation within the solution. The above definitions make clear that the only determiner of
behavior in games, according to this theory, is the amounts of money which may be won or lost, or the
expected amounts in games with random elements..
The minimax loss principle.
The minimax loss principle is to consider, for each possible strategy that you could adopt, what the
worst possible outcome is, and then to select that strategy which would have the least side effects if
the worst possible outcome happened.
The maximin gain. This rule makes considerable sense in two-person games when you consider that
the other player is out to get you, and so will do his best to make the worst possible outcome for you
occur.
The zero sum game is the simplest and most common in which one player wins what the other player
loses, or, more generally, the one for which the sum of all the payments made as a result of the game
is zero.
The nonzero-sum games can be diminished by assuming the existence of a fictitious extra player,
who wins or loses enough to bring the sum of payments back to zero.
Von neuman chose to introduce the notion of a mixed strategy, which is a probability distribution of two
or more pure strategies. The fundamental theorem of the theory of games is that if both players in a
zero-sum two-person game adopt mixed strategies which minimize the maximum expected loss, then
the game will always have a saddle-point. Games involving more than two people introduce a new
element—the possibility that two or more players will cooperate to beat the rest. Such a cooperative
agreement is called a coalition, and it frequently involves side-payments among members of the
coalition. The method of analysis for three-or-more-person games is to consider all possible coalitions
and to solve the game for each coalition on the principles of a two-person game.
Lecture 2: History
Some Simple Psychological Principles
Many choices are automatic:People do not always know what they want and why they do something
People are social animals: It Is not only about what you have, but also about what the other has
People respond to mental models: There is not always an objective truth
People are hard to mobilize: They are inert and do not optimize
Small changes can have big effects: These are not always to predict
Rears may be counterproductive:
The cobra effect.
The goal of this idea was first to decrease the cobra’s by give people money when someone kills
them. But this worked counterproductive. People were going to bread cobra’s so they could receive
more money. As a result the amount of cobra’s didn’t decrease.
Punishment may be counterproductive
Daycare
The people who come late they got a fine. The idea was that they wouldn’t be late anymore. But this
worked counterproductive because they pay a little extra for more daycare. So more people came late.
People see It at first as a violence but after that people see it as a economic transaction.
Teen mom
Teenage girls taking care of a baby to reduce teenage pregnancies: More teenage pregnancies.
Because the teenagers got with a baby more social contact and a purpose in life.
Jeremy Bentham
Utility is important and should be maintained. Bentham made the koepelgevangenis which was made
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