PSYCHOLOGY OF ECONOMIC BEHAVIOUR
Exam details:
3 hours
Open ended questions 7 questions (a and b)
Two questions per lecture
General Exam Tips:
Focus on main outcomes & findings of articles
Main theories/ paradigms discussed in the articles
Can ask “how did they measure/investigate this?” then you have to know the paradigm that
they used
Look at pdf document with articles for tips on what to focus on for some of the articles.
If your explanation makes sense according to the theories and findings of the article, your
answer will be right.
Specific Exam Questions:
When mentioned in class, I added questions to lecture summary
Previous exam question at the end of the summary
Lectures:
Each lecture is based on an economic assumption
, Week 1: Thinking like an economist
Themes we will cover in this course:
Information
Maximising – or are you just wanting satisfaction?
Self-interest (greed)
Stable preferences
No emotions – will focus on regret.
Articles
Greed
1. Van Dijk: Thinking and deciding like an economist (unpublished)
2. Hoyer et al. (2022): Dispositional greed
Choosing
3. Iyengar & Lepper (2000): When choice is demotivating
4. Schwartz et al. (2002): Maximizing versus satisficing
5. Redden et al. (2017): Choosing and satiation
1.1 Intro
Economic theories and assumptions about decision making exist, but in reality, we don’t
behave according to these models
But we might be able to better predict behaviour by using these models
1776: Adam Smith wrote a book called 'Wealth of Nations'
He introduced some concepts:
Rational Economic Man = assumption that we are only guided by our own interest, everyone
goes for the most advantageous, we want to maximise our own outcomes
The invisible hand = the market mechanism, sees to it that everything works out perfectly,
market makes sure that there is no unemployment (we now know this is not true).
He has this assumption in the model he describes: “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)
o If every economic act is for the good of the person themselves, at the end it will be
the best for everyone. The market will solve it.
o Not that everyone is happy, but that there will be no unemployment.
Carl Menger (1871) wrote a book ‘Grundsätze’
He introduced these concepts:
Utility – something can have more utility for one person than for another – its subjective.
Motives – More psychological way of thinking
o Life, food and tobacco
o Hierarchy in the things we want: (Hierarchy of motives – later we have Maslow)
A person will go for food first, and as
I have satisfied that at a certain level,
you will start looking for something
else, until you can satisfy that.
In his life, tobacco was nr 5 on his list
of motives.
,Van Dijk: Thinking and deciding like an economist (unpublished)
Micro-economics The rational consumer
All we need to predict what and how much a person will buy is:
1. Preferences
What you want
We assume that only two products exist.
Properties if indifference curves:
The lines represent a combination of goods. The person is indifferent to any combination of
things on the curve – all have equal utility for them. (Indifferent to having 5 books and 5 CDs
vs having 10 CDs and 2 books).
1. Away from 0, the higher you go up: Higher utility (5
book and 5 CDs < 6 books and 6 CDs)
2. Negative slope: Substitution (the more you have of
one, the less you can have of the other)
o Curves always goes down in a curve linear
way
3. Convex in shape: The more X you have, the less value
you put on increasing X (the more you already have of
X, the less value is added when you add one unit of it,
so the less of Y you want to give up for it)
2. Income
Income limits what you can buy.
Green = budget line (ex. Only have $100) – limits you to only
buy a certain amount of things. For $100 you can buy 10
books, but then you can buy no CDs, or other way around.
Can NEVER buy something above green line.
You want to achieve the highest utility given my budget =
maximisation
o In this example you will buy 5 Books and 5 CDs.
o This is the prediction we make with rational economic
theory about what you will do.
3. Prices
What do the products cost?
1.2 Rational Economic Man
We have to ask the question if this is the rational economic man decision? Were you thinking
like this when you were buying something? Did you look at maximum utility for your budget?
o This is not really how people make their decisions in real life.
o These are just assumptions.
REM Characteristics
Has all the info and knows how to use it to make a decision
Always maximises his utility
Acts out of self-interest
Has stable preferences
Does not take emotions into account
, 1.3 Greed
It’s an assumption in Economics
Psychologists who try and study this concept to see if it’s actually true:
Hoyer et al. (2022): Dispositional greed
Greed
Vs. Maximizing (maybe we are maximizing – we want more, more, more)
Vs. Materialism (concept of greed is much broader than being materialistic, can be greedy for
a lot of things, not just money)
Vs. Self-interest (not that you want more, but that you are just focused on your own interest)
Tips for the article:
Don’t worry too much about the predictions and reasoning coming up to their argumentations
Focus on attempts to measure greed, and the main relations they found, not what they
predict.
The outcomes are a bit messy
Focus on what is said in lecture
Know that their approach is correlational.
Their approach:
LISS panel (N = 2,376), correlational
Measures of greed and of self-interest
o Measure the two and get comparison (correlation between it)
Demographics (age, gender)
Outcomes:
Economic outcomes
o (personal & household income)
Evolutionary outcomes
o (# children, longest relation, # sexual partners)
Psychological outcomes
o (satisfaction with life) – assume that if you go for the highest, you will feel good about
it
Measures they used:
Dispositional greed scale – they came up with and validated this scale:
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.
Also want to compare it with Self-interest – used Social Value Orientation
- If people choose like this, they are self-interested
- Choices between hypothetical outcome distributions between you and someone else
Three types of people:
1. Competitive person (480 – 80): you just want more than others.
2. Self-interested person (540 – 280): Don’t care what other person
gets, just choose highest for you, as if there is no other person.
3. Pro-social person (480-480): Overall together highest value.
Their approach is to compare person’s SVO with their greed and see if it correlates
