Behavioural and Evolutionary Economics

Behavioural and Evolutionary Economics

1. Lakatos

   • Progressive: increasing explanatory power
     • Modern Behavioural Econ
       • study: effects ofpsychological, social, cognitive and emotional factors on decisions
       • verificationist
       • observation & experimentation
   • Degenerating: explanatory power only maintained by ad hoc modifcations to allow unexpected findings to fit
     • Neoclassical
       • deductivity theory and method
         • verifcationist approach to hyp testing
       • normative bias - doesn't explain actual econ; but utopia

2. Automotive Sector

   • different decision making processes: corporate vs family customer
   • little knowledge of market (don't buy cars often)
   • Kelly: Core Identity
     • emotions exploited to prompt consumption
     • dismissal of options that don't match identity
   • Enjoyment by Anticipation
     • test drive + talk about how car fills core values
   • wealth is relative
   • Biases and Heuristics
     • Anchoring ($)
     • Loss Aversion
     • Sunk Cost Fallacy (time)
   • Information overload ("Confusopoly")
     • revert to default options
   • Social Pressure - Fishbein-Ajzen model of behavioural intentions

3. Economics of Happiness: Easterlin Paradox

   • Relative Wages
     • Fairness
     • Justice
     • Local Reference Point - Anchoring Heuristic
   • Psychological Desires
     • Status
       • autonomy
       • control & lower uncertainty
       • Org. Rank
     • Novelty (comfort vs pleasure) (Scitovsky)
       • the brain shuts down if it receives no stimulation; but if we receive too much novelty too fast, it can overwhelm the brain
       • Modern life makes it easy to meet our basic needs, resulting in a lack of stimulus
       • habituate very quickly to changes in happiness.
     • Challenge
       • personal identity constructs limit ability to embrace opportunity
     • Social Security
       • Shackle
   • Aspirations (Simon, Cyert and March)
     • how realistic ?
     • how readily to aspiration adjust in line with attainments?
     • significant of core constructs to the aspiration
     • aspirations and ability to adjust - strong correlation to happiness and Income
   • Perspective & Frame of Mind
     • ways of thinking determine perception of stimuli
     • glass half full vs glass half empty
   • Biases & Heuristics
     • social reference points
     • Representativeness
     • Anchoring

4. Relationship Decisions: Partners, Children, Termination

   • Choice of Partner
     • Rarely Calculated Decisions
     • Utility Maximising: gather all info, do not settle for 2nd best, looking for better mate while in relationship
       • vs
         • Satisficing (Simon): decide on preferences, select someone who meets criteria
           • Aspiration levels set by external reference points (friends, family, TV)
             • Watching romantic movies lowers relationship satisfaction
           • Simple Search Rules
       • unhappy, regretful
         • needle/haystack analogy
     • "Price" or value of a person
       • Consumer Surplus (Settler / Reacher)
       • Price will be equal
       • Attractiveness is subjective
         • Friedman: supermodel marries man who promises to wash all dishes
   • Children
     • Cognitive Dissonance
     • Heuristics & Biases
       • Hyperbolic discounting
       • overconfidence
       • Illusory Correlation (representativeness)
       • Anchoring
     • Shackle - life-changing entrepreneurial gamble (high uncertainty)
       • no probabilities, just obstacles
         • no obstacle to happy marriage -> seen as perfectly possible -> unsuccessful marriage is a surprise
     • External reference points (Simon)
     • Evolutionary Approach: Routines used in raising children (from own childhood)
   • Termination
     • Clash in core values
     • Biases & Heuristics
       • Confirmation Bias
       • Sunk Cost Fallacy
       • Hyperbolic Discounting
       • Anchoring
       • Endowment Effect
       • Loss Aversion
       • Status Quo
     • Stuck because of core values (Loyalty)

5. Behavioural Theory of the Firm vs Kahneman & Tversky vs Nelson & Winters Evolutionary Analysis

   • BTF (Simon, Cyert March)
     • pursuit of sub goals by all staff
       • Managers aversion to change
     • satisficing not optimising
     • multiple goals not one global strategy
     • attention to goals in sequential order
     • avoidance of uncertainty
       • 'if it works dont mess with it'
         • routines
       • allow small firms to experiment, buy them if it works
       • negotiated environment via lobbying
         • suppliers: Contracts
         • Customers: Marketing
   • Evolutionary (Nelson & Winters)
     • Firm as collection of staff knowledge
       • managers coordinate pool of resources
         • struggle implementing big changes
     • Routine based behaviour gives competitive advantage
       • survival of the fittest
       • rolled out on larger scale: franchising, licensing, buying out
   • Kahneman & Tversky
     • Heuristics & Biases influence decision making and subvert managers attempts to optimise profit
       • Founded in expertise: positive outcomes
       • Loss Aversion (links to uncertainty avoidance in BTF and routines of N&W)
     • Multiple goals: cognitive limitations, millers rule