The Psychology of Economic Behavior
College 1: Thinking like an economist
Reading meeting 1:
1. Van Dijk: Thinking and decided like an economist (unpublished)
2. Seuntjens et al. (2015): 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
The aim of this course: Understand the many economic behaviors we have (saving, investing, long/short term
choices). It is not only about prices, how many moneys they have, but you have to understand the psychology (how do
people make their decisions, how do they value their own values vs outcomes of others).
Once upon a time...
Adam smith & Carl Menger both introduced some important things in the economics. Carl Menger introduced the idea
of utility in economics.
Adam smith - 1776
Introduced the idea that we only want to maximize our own outcomes: that is the best thing you can do. He wrote that
in the ‘Wealth of Nations’. There he basically introduced the idea of the Rational Economic Man (not literally calling
it like that). He talks about the markets as it was the invisible hand and had a great confidence that markets solve
anything’s (supply and demands markets; concept of market mechanism: focus on their own: example, people who are
workless, will work for whatever price because they want to work. Therefore, nobody is unemployed because working
is cheap). His assumption was that if every economic actor would only work to maximize his own advantages, it will
all work out fine, because the market mechanism, the invisible hand will lead to no unemployment etc.
‘’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. (Book 4, Chapter 2, Wealth of Nations) ‘’
This has dominated the assumptions of economic theory. When economic theorist talks about normative solutions,
they often refer to the normative solutions/analysis, assuming that if all actors are self-interested, what would happen
and what would be the best outcome. (so not what is right or wrong)
Carl Menger (1871) – Utility and Motives
He talked about utility and motives. He did not only focus on the objective outcomes (objective outcome: 100 euro’s
is equal for everyone). But what matters is: what is the utility for you? Does these 100 euros’ make a difference for
you. If you give it to a millionaire, the utility is low.
‘Grundsätze’: Book where he introduced utility (utility is not the same for everyone (maybe you want to drink and I
don’t want to drink). He also talked about the motives. Motives may differ in the economics. Motives about food and
Tabaco. He talks about that our needs are hierarchically ordered. He talked about that our life’s is all about food, and
tobacco. Menger had something similar as Maslow (piramide). Idea: everybody’s first motivation is food (to survive),
but at some point, if you have achieved a certain level (not completely satisfied, but kind of satisfied), you start
thinking about the next level. The fifth level is tabaco (In Maslow it is self-actualization).
Micro-economics: economics on how people makes their decisions.
The rational consumer: The main issue to predict what people will do and why your here, all you need is you
have to have an idea about.
- Preferences: Having to do with the utility
- Income: How much do you have to buy all this
- Prices: Of the products you want to buy
In every micro-economics book your will see the simplified indifference curves.
Based on this you can predict what people will decide. Predicting what one will do:
based on mapping some assumptions about the utility that you derive from these
,products. indifference curves or iso-utility curves. Guessing someone’s. Preferences. Each curves gives the same
utility of product proportion
Properties indifference curves: the underlying assumptions
1. Away from 0: higher utility
2. Negative slope: substitution. Has to be with a negative slope, otherwise the utility can not be the same
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)
If you want to know how much you are going to buy, you have to know how rich you are (what is your budget). And
you need something to know about the prices. This is all covered in the budget line. Books cost 10 euros, same for the
CD’s and your income is 100 euro’s. So, you could buy 10 books or 10 CD’s or something in between.
What combinations can you to afford? From this we can predict what someone will do
You want to achieve the maximum utility. You want to reach the highest utility curve that you could reach,
given your budget. This individual would buy 5 books and 5 cds. This theory describes all the decisions you
make.
Is it a bird? Is it a plane?
Do you make every discission you make in this way?
Water bottle: Assumption: I thought of all the thing I could buy, then I thought: this is my budget and given my
budget I think I’ll buy a bottle of that. Is this the way we make our decisions? Or should we also look at other insides
in psychology besides utility and besides simplifying assumptions.
Rational Economic Man (decision maker, it’s an assumption in economic theory but we won’t see him in reality)
This is an assumption that is not correct. It looks likes us, maybe in a way we make these decisions, but we are not
that rational. We don’t think about all these options and immediately know what we have to do.
If we want to understand and help people making better decisions, we have to understand how they do make their
decisions. You need to know the psychology underlying the real decisions. That doesn’t mean that the rational models
are stupid, they have their own functions, but for something your need a better model. This course focus on all about
that.
- Information: How do we deal with all the information about these products, does it fit with the models
- Maximizing: do we always maximize things?
- Self-interest (greed),
- Stable preferences (are our preferences stable? Our preferences can be influenced by framing; predictably
unstable)
- No emotions; regret is a very important emotion
Article 2: Seuntjens et al. (2015): Dispositional greed
You have your own idea what greediness is like. If you take a look at the article, they realize that is connects to many
other topics. You would think that greed is the same as maximizing, it not the same. Maximizing is about getting the
best solutions, matching your utility and budget and what works best for you. But greed is moving beyond that; only
focusing on more more more more more. Of course, it connects to materialism (wanting more products), self-interest
(don’t care about the outcomes of others) and envy but it is not the same. But of course, there are some connections
between these four aspects and greediness
Dispositional greed (wanting more and more) (scale), how well does this describes you?
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.
This study shows that: the older you get, the less your score on dispositional
greed. This does not explain why they seems to be less greedy (born in other
area/the older you get, the less you need?)
Study 3: Lower donations in Dictator Game: does this effect greediness
Study 4: Lower donations in Ultimatum Game, (Bargaining game; two persons with more interactions and offers)
more often reject low offers
Study 5: Less cooperative in resource dilemma
The Follow up study – NIBUD
People who score higher on greed, earn more
money. High on greed helps you maybe in
life to work harder, earn more money. But
they also had more expenses and less savings.
Greedier More endebt
Outline: Dealing with information (article 3: Iyengar & Lepper, 2000: Choice overload)
Their basic point is that sometimes we are overwhelmed with all these options and varieties. How do we deal with
that? If you are a maximizer and you have to make a lot of choices, there should be a combination that definitely fits
you. The basic statement in their article is: too much choice might not be a good idea.
Draeger’s Supermarket, Menlo Park, California
- 250 varieties of mustard
- 75 varieties of olive oil
- > 300 varieties jam
Study 1: Jam
First: How many people will stop at my stand? A lot of stops
because the chance that there is a good jam is greater. People
tend to stop more at a stand with more variety (initially desirable)
Second: However, people are more tend to buy a jam if there are
less options
You overwhelm people with making a decision, this causes
that they do not buy.
Study 3: Bonbons
First: People say they like more
choices. Second: More difficult to
make a choice when there are 30
choices. Most frustrated with 30
chocolates and most satisfied with
the choice between 6 chocolates
Conclusion: too much choice
Many choices may appear attractive
But there is a downside: it is overwhelming, our capacity is limited we cannot deal with all the choices. This might
be tied in with greediness.
Barry Schwartz: The tyranny of choice? (Article 4: Schwartz et al., 2002: Maximizing vs satisficing)
Freedom well being. Everybody would agree that more freedom gives you more wellbeing. Probably all of you
would also agree with: choice freedom. Having free choice, will make you experience freedom. This basically
means that choice leads to well-being.
, Barry Schwartz; Herbert Simon (Nobel Prize 1978): Maximizing and satisficing
- Herbert: Economic decision makers often do not maximize but satisfice. You are not going for the optimum,
you have a standard in mind, a threshold, and when there is an option that exceed your threshold, that it is
enough.
- Schwartz: maybe some people are like maximizers and some are like satisfiers. Maybe there is a dispositional
difference here, maybe because how we are raised or born.
- Who would be happier, people that maximize all the time or the satisfiers?
Study 1
He developed a scale for maximization/satisficing (and regret) scale.
- “When I watch TV, I channel surf, often scanning through the available options even while attempting to
watch one program” (if it describes you Maximizer, looking for something better)
In this study he looked at the correlation with happiness, satisfaction, regret and depression. The maximizers they
where less happy, less satisfied, experience more regret and more depression. Maximizers are less happy, because
you always think that you could have got more.
Study 2: consumer context
- Recall inexpensive/expensive recent purchase: No effect was found
- Correlational study in relation with maximizing
o Regret +
o Happiness –
o Social comparison +
Study 4: Ultimatum bargaining
The game is about two persons (the allocator and the recipient). One person makes an ultimatum, with no counteroffer
from the other. The recipient can only reject or accept the offer from the allocator. If he accepts the offer, both got
what is offered. If they reject it, both get 0.
What is the rational thing to do? (Dividing 10 dollar)
If both the allocator and the recipient were thinking rational, they the the allocator will give himself 9.99 dollar and
offer 0.01 dollar. Then the recipient will accept the offer, otherwise he gets nothing. This differs from what people
actually do: Allocators will give high offers and the recipients reject low offers.
Regret can be an important motive here. The allocator will experience regret when their too low offer has been
rejected and now have nothing. But does this also apply to too high offers? No, normally as an allocator you can not
know if it was too high, you could only learn about what the others rejected and accepted. So, if someone accepted it,
you still not know if it was too high
Then he changed the ultimatum bargaining game. The allocator will receive feedback on their minimal
acceptable offer. This will lead too anticipated regret in high offers. This will make the allocator offer lower offers
(lower the chance of experience regret; maximizer would care more about the regret)
More decisions, more choices… (article 5: Redden et al., 2017: Choosing and satiation)
This study is about repetitive choices. Choosing allows you to choose what’s best for you, but…If you make repeated
decisions that resemble the each other (not the outcome but the decisions itselves), it will decrease utility. Making
repetitive choices increases satiation (I had enough).
Study 1: raking songs
- Rank top 5 songs,
- 2/3/4 are played
- Rate enjoyment of the 3 heard
- Choosing (which song you want to hear) vs. no choosing
(=randomly determined).
-
Nope.
No difference in variety
Decision time does not explain the increased effect of choice on satiation
Yes
Majority would rather choose (in future study)… (see Schwartz!). those who had to choose over and over again,
people would like to choose instead of random. Choosing was not a good idea because it reduced attractiveness but
