The Psychology of Economic Behaviour (6464EL15Y_2324_S2)
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The Psychology of Economic Behaviour (6464EL15Y_2324_S2)
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Universiteit Leiden (UL)
This is a summary of all articles of the course/elective the Psychology of Economic Behaviour. Besides, it includes all the information from the lecture slides and notes. My grade for the course was a 9 :)
The Psychology of Economic Behaviour (6464EL15Y_2324_S2)
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THE PSYCHOLOGY OF ECONOMIC BEHAVIOUR – SUMMARY
LECTURE 1: THINKING LIKE AN ECONOMIST
INSTRUCTIONS
• mini intro on (rational) consumer choice according to micro economics.
• how decision-makers deal with complex decisions, in particular with the many options that they often have
to choose from → problems of having too many options + decision-process for complex situations.
ADVICE: concentrate on the basic message → intro, general findings, main conclusions
ARTICLES
1. Van Dijk: Thinking and deciding like an economist (unpublished)
2. Hoyer et al. (2022): Dispositional greed
3. Iyengar & Lepper (2000): When choice is demotivating
4. Schwartz et al. (2002): Maximizing versus satisficing
5. Redden et al. (2017): Choosing and satiation
THINKING LIKE AN ECONOMIST; MICRO ECONOMICS (LECTURE)
• Field of economics
• Assumptions
1776: Adam Smith
• Wealth of nations
• Rational economic man: decision makers are rational and that is a good thing
• The invisible hand: market mechanisms, lot of unemployment → to get job workers has to lower
→ outcome is perfect for society
→ focus on individuals going after own outcomes
• Every individual is continually exerting himself to find out the most advantageous employment for
whatever capital he can command. It is his own advantage, indeed, and not that of the society which he
has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that
employment which is most advantageous to the society
Carl Menger (1871)
• Grundsatze
• Utility: not just objective outcomes, how much utility a choice gives to us, utility we assign to objective
outcomes
Menger’s view on life, food and tobacco
• Hierarchy of what we want
• Most basic things we need: food
• Satisfied → something else comes up that is interesting (level 2)
• Is about motives → satisfies need go to other need
→ reminds of Maslov (way before Maslov) same principal
,1. THINKING AND DECIDING LIKE AN ECONOMIST (VAN DIJK)
• economics and psychology have developed as 2 different disciplines → have many interests in common.
- Economic behavior is essentially social behavior: decisions to save, consume, buy and sell, are all taken in
social settings, and eventually result from a decision-making process that is psychological
Theory of Rational consumer choice
• Assumption: decision-makers have well-defined preferences: they know what they like.
- decision-making in economics: rational process, maximize own utility, while knowing their own (stable)
preferences, able to deal with the most complex decision situations.
→ Primary task of the decision-makers is to allocate their income to best serve their preferences.
Micro-economics
The rational consumer:
• Preferences
• Income
• prices
1. Preferences: Indifference curves
• consumer considering 2 goods: CDs and books.
• general assumption → decision-makers have stable preferences for CDs and books.
→ These preferences can be mapped graphically in indifference curves: depicts all combinations of goods
(here books and CDs) that are equally attractive to the decision-maker.
Preferences: indifference curves/iso utility curves → combines all combinations of products in which consumer
is indifferent → same utility → the higher the better the higher utility
- From this curve, conclude that the decision-maker considered here is indifferent for the combinations 5
books and 2 CD, 2 books and 4 CDs and 1 book and 6 CDs.
Properties indifference curve:
1. Away from O: higher utility → the farther away from the Origin, the higher the 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)
→ Not linear
• Each curve combines combinations that are equality attractive to the decision-maker (having equal utility).
• Additional assumption: “more is better” assumption/“axiom of greed”:
- other things equal – more of a good is preferred to less.
→ utility of IC4 > IC3 > IC2 > IC1 → because more is better, always reach for the highest indifference curve.
2
,Curves are downward sloping
• indifference curves: combinations for which you are assumed to be indifferent.
→ You move along the indifference curve from 2 CDs to 6 CDs, you can only be indifferent to this change if
at the same time you give up some of the books (if you move from 5 books to 1 book)
Issue
• indifference curves are convex to the Origin (to the combination of 0 books, 0 CDs)
→ the more CDs you have got, the less prepared you are to give up books to get even more CDs.
- 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.
- Figure 1: to move from 2 to 4 CDs prepared to give up 3 books (to move from 5 to 2 books). But to move
from 4 to 6 CDs, only prepared to give up 1 book (to move from 2 books to one book).
2. Income restrictions: The budget line
• graphically present budget restriction by drawing a budget line that connects all combinations of books and
CDs that we could buy if we were to spend our entire budget.
- give the budget restrictions and prices of books and CDs:
→ all combinations on or below the budget line can be obtained
→ all combinations that lie to the right of the budget line are out of reach and unaffordable.
Maximize utility, restrained by budget
Maximize
• The way you maximize is highest utility given your budget → Iso utility curve that is the highest → one you
can just reach → maximize utility given budget and restrictions
3
, Rational economic man assumptions
1. Information
2. Maximizing → he knows his budget constraints, and succeeds in maximizing utility, given these constraints
3. Self-interest (greed) → he is greedy, and his adage is “more is better” + he is selfish and only seems to care
about the own outcomes: Outcomes to others are not included in the analysis, and don’t matter
4. Stable preferences → he knows his preferences, and these preferences are assumed to be stable
5. No emotions → he does not seem to have any emotions: pictures man as nonsocial and nonemotional.
• Preferences are not stable at all → Predictably stable → Predictably unstable preferences – explain +
predict economic behavior
GREED → 2. GREED: WHAT IS IT GOOD FOR? (HOYER, ZEELENBERG & BREUGELMANS, 2022, ONLINE FIRST)
INTRODUCTION
• If all people are equally greeded? → see if there are individual differences
Greed as Good or Bad
• Greed: desire to acquire more →excessive/ insatiable desire
→ Bad: excessive, wasteful, resulting in accumulation beyond what is needed, and harmful to other people
→ Good:
- Economics: stimulate productivity and economic growth and motivate development of new products and
industries, which in turn increases employment, wealth, and well-being
- Evolutionary theorists: essential for human welfare and to facilitate self- preservation because greedy
behaviors provide an evolutionary advantage for those living in scarce environments
Greed VS:
• Maximizing: getting optimal choice: rational balancing of costs and benefits
→ Greedy people desire to acquire more and go into debt to buy the desired product: not rational endeavor
• Materialism: desire for material possessions to signal success in life
→ Greed is broader construct: can also be experienced for nonmaterial outcomes such as sex, food, or power
• Self-interest: not about more, but care about own interest/outcomes you have in mind, rational
→ Greed is not rational
→ According to Adam Smith, greed does not equal self-interest because greed disregards the welfare of others
and could even work against the self-interest of people.
→ Self-interest: comparison between self and others, greed: acquisitiveness and doesn’t involve others
→ Both greedy and self-interested people focus on the fulfillment of their own needs.
• Envy: others are better off while we do not feel they deserve it, driven by an external factor (wanting what
others have)
→ Greed is unrelated to what others have, driven by internal motivations (wanting more)
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