Week 1: Thinking like an economist
Lecture notes
The aim of this course: to understand the many economic behaviors that we have, such as
saving, investing, making short term and long term decisions, making sustainable decisions.
Introduction
Who were the people that decided what is economic theory?
Adam Smith (1776): ‘Wealth of Nations’.
o Rational Economic Man = always thinks about himself and tries to do what’s
best for himself.
o The invisible hand = the market mechanism; if we all think about our own
outcomes, we live in a perfect world. However, this does not work the way he
assumed.
Carl Menger (1871): ‘Grundsätze’.
o Utility = the subjective idea that something is needed or useful to have.
o Motives that people have to buy products and assign utility to products.
o Certain levels of motivation, based on utility.
,Van Dijk (unpublished paper): Thinking and deciding like an economist.
Main subject: Introduction to the thinking of economists. What is the economic theory and
why is it not enough? Why do we need psychology?
The dominating view in economics is to picture decision-making as a rational process, in
which decision-makers aim to maximize their own utility, while knowing their own (stable)
preferences, and being able to deal with the most complex decision situations.
Micro-economics
To predict the decisions of the rational consumer, we have to have an idea of their:
Preferences;
Income;
Prices.
Indifference curves for preferences:
1. Away from 0 = higher utility.
2. Negative slope = substitution.
3. Convex to 0 = the more X you have, the less value you put on increasing X (the less
of Y you want to give up for that). Example: if you have 1000 CD’s, having 1001 CD’s
is not that interesting.
Budget line (based on maximizing)
We can graphically present our budget restriction by drawing a budget line that connects all
combinations that we could buy if we would spend our entire budget. All combinations on or
below the budget line can be obtained.
,Iyengar, S, & Lepper, M. (2000). When choice is demotivating: Can one desire
too much of a good thing?
Main subject: How do we make our decisions, if we know that there are many products to
choose from? This research explores choice overload.
The choice overload hypothesis underlying these studies is that, although the provision of
extensive choices may sometimes still be seen as initially desirable, it may also prove
unexpectedly demotivating in the end.
Experiment 1
Draeger’s Supermarket, Menlo Park, Ca.
250 varieties of mustard.
75 varieties olive oil.
> 300 varieties jam.
This experiment was done with a stand with samples and jars of jams.
More choices were initially desirable: the more jams they offered, the more people stopped at
the stand. However, the more jams they offered, the less people that stopped bought
something.
Experiment 2
Essay topics for social psychology students. Intrinsic motivation was assessed by comparing
the percentage of students that completed the assignment across the two conditions and the
quality of the essays. The students seemed to be more motivated when they got to choose
from less essay topics and even performed better in such limited-choice contexts.
Experiment 3
Choosing between chocolates (6 chocolates versus 30 chocolates).
People liked more chocolates to choose from, but they also found the choosing more difficult
and were less satisfied with their decision. When people were offered $5 or some
chocolates, the people in the 6 chocolates condition chose chocolates over money. In the
condition with 30 chocolates chose the money way more often.
Conclusion
Many choices may appear attractive, but they are also overwhelming. The three studies
describe that having more choices may sometimes have detrimental consequences for
human motivation. The provision of extensive choices may undermine choosers’ subsequent
satisfaction and motivation.
, Schwartz, B., Ward, A., Monterosso, J., Lyubomirsky, S., White, K., & Lehman,
D. R. (2002). Maximizing versus satisficing: Happiness is a matter of choice.
Main subject: According to this article, we sometimes are not maximizing, but sometimes
we are satisficing. Sometimes we just choose a product because it’s good enough.
An assumption in the psychology of economic behavior is that people always try to
maximize. This research challenges that assumption, by reasoning that people are not
maximizing, but satisficing.
Satisficing = if you make an economic decision, you’re not concerned by the maximum that
you can choose, but you probably have a certain threshold. This threshold means that if it’s
better than this, it’s good enough.
There is also being discussed if it is the case that some people are maximizers and some are
satisficers.
Study 1
Development of a maximization/satisficing scale and a regret experience scale.
Examples:
When I watch TV, I channel surf, often scanning through the available options even
while attempting to watch one program.
When shopping, I have a hard time finding clothing that I really love.
No matter what I do, I have the highest standards for myself.
I never settle for second best.
The correlations of maximizing with other psychological constructs were also being
measured:
Happiness: negative correlation.
Satisfaction: negative correlation.
Regret: positive correlation.
Depression: positive correlation.
Study 2
The participants were asked to recall an inexpensive/expensive recent purchase.
Correlations with maximizing:
Regret: positive correlation.
Happiness: negative correlation.
Social comparison: positive correlation.
Conclusion: maximizers were less satisfied with consumer decisions than satisficers, and
more likely to engage in social comparison.
Study 3
There was tested whether moods and self-evaluations of maximizers were more vulnerable
or sensitive to unsolicited social comparison information than satisficers. This study asked
participants to solve anagrams at whatever rate they were capable, but manipulated the
ostensible performance of an undergraduate peer so that participants experienced relative
