The Psychology of Economic Behavior – Notes
By Linda Bomm
2022
General tips from Eric for this course
- When reading, focus on: intro, general findings, main conclusions
- Purpose of course: learn more about (psychological) processes underlying economic decisions
- He will ask us about the main findings from experiments. When asked in the exam, we should talk
about the main theoretical issue at stake.
o We do need a general idea about how the studies were designed
o We get example questions towards end of course
WEEK 1: Thinking like an economist
Index of week 1
1.1 Microeconomics and rational economic man
1.2 Greed (article: Seuntjens et al., 2015)
1.3 Dealing with information – choice overload (article: Iyengar et al., 2000)
1.4 Maximizing vs. satisficing (article: Schwartz et al., 2002)
1.5 Repetitive choice (article: Redden et al., 2017)
Lecture 1 – Notes
- Background of economics:
o Adam Smith
§ Wrote “wealth of nations”, called markets the “invisible hand” that regulate
themselves by supply and demand.
§ Said: humans always want to maximize their own gains, basically introduced the
idea of rational man without calling it that
§ About employment: says that every individual looks for the employment that
benefits themselves the most (and not the society). But the study of his own
advantage makes him automatically prefer the employment that is most
advantageous to society.
o Carl Menger
§ Introduced idea of utility
§ Said: Needs are hierarchically ordered
• People are motivated by first satisfying a certain level of need.
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,1.1 Microeconomics
- Assumes the “rational consumer”
- Assumes it can perfectly predict what a person will do, by knowing:
o Preferences, income, cost of a product
- Preferences can be depicted as indifference curves
o A person can have multiple indifference curves
o The utility is always highest on the highest indifference curve: 7 books + 7 CDs has higher
utility than 5 books + 5 CDs
o Assumptions of indifference curves:
§ 1. The further away from the bottom, the higher the utility
§ 2. Curve has a negative slope: has to be, otherwise the utility of the different
allocations on the different points on the curve wouldn’t have the same utility
§ 3. Curve has convex shape: the more X you have, the less value you put on when
you increase X (the more you already have of sth, the less value is added when you
add one unit of it, aka the less of Y you want to give up for it)
o Budget lines
§ You want the highest utility curve you can reach given your budget
§ Green: budget line. And you choose the indifference curve that lies at the highest
point relative to the budget line.
- Characteristics of rational economic man
o Has all available information and knows how to use it
o Is maximizing (always chooses the option with best expected outcomes and highest expected
utility
o Acts only out of self-interest (greed)
o Has stable preferences
o Has accurate predictions and memories of his preferences
o Has no emotions
§ Most important emotion in Economic Psych: regret
• What you get when you make a decision and then realize: other decision
would’ve given you better outcome
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,1.2 Greed
- Difference to Maximizing: greed doesn’t stop, you always want more
- Difference materialism: you can also be greedy about non-material things, e.g. power
- Difference self-interest: greed can also make you do things that aren’t in your self-interest, but
actually bad for you
- Different from envy as well
Article: Seuntjens, T. G., Zeelenberg, M., Van de Ven, N., & Breugelmans, S. (2015). Dispositional greed. Journal
of Personality and Social Psychology, 108(6), 917-933.
- Scale developed by Seuntjes et al.
- Working definition of greed: always wanting more, never being satisfied with what one currently has
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- The older ppl get, the lower they score on dispositional greed scale
- Evidence for construct and discriminant validity through correlations of dispositional greed with…:
o + maximization, self-interest, envy, materialism, impulsiveness
o - self-control, life satisfaction, concern for others
- DGS predicts greedy behavioral tendencies over and above materialism
o Greed vs. materialism: materialism is more predictive for being drawn to material goods;
greed more predictive for being drawn to nonmaterial goods (sex, food, friends)
- DGS reliably predicts greedy economic behavior: people high on DGS allocate more money to
themselves in dictator games and ultimatum games, and take more in resource dilemmas
o Greedy people also reject more offers in ultimatum games
1.3 Dealing with information – choice overload
Article: Iyengar & Lepper, 2000: When Choice is Demotivating: Can One Desire Too Much
of a Good Thing?
- Investigates choice overload
o Popular notion: the more choice, the better – but their 3 experimental studies challenge this
assumption
o When offered a limited array of 6 choices (vs. 24 or 30 choices) à people are more likely to
purchase gourmet jams or chocolates, or to undertake optional class essay assignments.
§ Participants were also more satisfied with their choice, and wrote better essays
- Reasoning behind study:
o As attractiveness of alternatives rises, people experience conflict, defer decisions, look for
new alternatives, choose the default, or opt to not make choice at all
o As complexity of making choices rises, people simplify their decisions-making processes by
relying on simple heuristics (selection, evaluation, and integration of information are
affected by number of options)
- Choice overload hypothesis: Although the provision of extensive choices may sometimes be seen as
initially desirable, it may also prove unexpectedly demotivating in the end
§ à Having a limited (psychologically manageable) set of choices may be more
intrinsically motivating than having an extensive (psychologically excessive) set of
choices
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, - Results:
o Initial attractiveness: more people initially stopped and sampled at extensive array than at
limited array
o PURCHASING behavior: more ppl bought after sampling from limited array than from
extensive array
o ASSIGNMENT completion: more students presented with 6 topics completed essay than
those presented with 30 topics
o QUALITY of essays: students in limited-choice condition performed slightly (but still
significantly) better
o SATISFACTION: people enjoy choosing from extensive array more, but are more satisfied
when choosing from limited array
- à Although having more choices might seem desirable, it can have detrimental consequences for
human motivation
o Possible reasons:
§ 1. Disengage: Information problem: hard to make effortful deliberations between
30 options, so rather than even trying, people DISENGAGE from choice-making
process à chooser may be unable to use the psychological processes for for the
enhancement of the attractiveness of their own choices.
§ 2. Potential regret: the more options there are, the higher the chance of making a
nonoptimal choice, and this prospect may undermine any pleasure one gets from
the actual choice
o à Responsibility of making the right decision is an effortful burden
Critiques by Eric about Iyengar et al., 2000:
- At some point they treat the measure of regret as an inverse of satisfaction – but that is of course not
exactly the same
- They claim that they measured whether people were motivated by satisficizing or maximizing, but
measured this by asking: “How confident are you that this chocolate will satisfy you?”. That is not a
good measure of maximizing vs. satisficing, and might therefore distort the subsequent conclusions
1.4 Maximizing and satisficing
Article: Schwartz, B., Ward, A., Monterosso, J., Lyubomirsky, S., White, K., & Lehman, D. R. (2002). Maximizing
versus satisficing: Happiness is a matter of choice.
o Maximizers feel more and more like they are worse off as options increase
- Maximizing vs. satisficing:
o Satisficing: going for the satisfying choice, not the best possible choice. Satisficer often
moves in direction of maximization without ever having a deliberate goal, by choosing a
higher ranked good over another one, IF he encounters that higher one
o Maximizers desire the BEST possible result; satisficers desire a result that is GOOD ENOUGH
to meet some criterion
- Correlations between maximization and other factors:
o – happiness, - life satisfaction, - optimism, - self-esteem, - happiness with their purchase
o + regret, + depression, + social comparison, + regret about their purchase
§ Maximizers are affected by social comparison (being slower than peer à more
negative mood and self-doubts), satisficers aren’t
• Possible explanation: social comparison and product comparison à
counterfactual thinking à regret
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