Tuesday, February 26, 2008

Behavioral Economics

In Enviro class yesterday, we briefly discussed the odd discrepancy between WTP and WTA measures of value. One hypothesis for this discrepancy -- known as prospect theory -- argues that people value gains and losses differently. This is one of many odd violations of standard rational agent models that is the focus of an area of economics known as behavioral economics.

I encourage you to learn more about this interesting field by checking out the following links:

(1) Here's an interesting article on the research done by the many interesting behavioral economists at Harvard. In it you will learn things like:

That overwhelming majorities of people would choose to save 200 people with certainty over a one in three change of saving 600, but will choose a one in three chance of saving 600 people over 400 people dying.

That on the same day the price of Shell stock in London traded at a different price than Royal Dutch stock in Amsterdam -- even though they are the same company.

That "if you ask people, ‘Which do you want right now, fruit or chocolate?’ they say, ‘Chocolate!’ But if you ask, ‘Which one a week from now?’ they will say, ‘Fruit.’" (Probably not that big of a surprise to anyone but 1980s economists.)

That placing a photo of a women on an advertisement has the same effect as 5 percentage point reduction in the interest rate on attracting men to a bank's loan promotion.

That France hates America more than Vietnam does.

And a number of other interesting challenges to the simple, rational, economic agent.
(2) If you are interested in a more dense, academic summary, I recommend this excellent overview by Berkeley economist (and the man mostly responsible for my passing Micro Theory my first year of grad school) Stefano DellaVigna.

(3) Finally, to see how behavioral economics is entering the world of politics and policy, check out this article on Barack Obama's economic advisers.

I want to be Hyper-Rational Economic Man when I grow up.

Beyond the disconnect that arises between classical economics and behavioral, the most interesting fact of the article was in the discussion of advertising and framing. Particularly that the more educated are doing better in the marketplace. And it seems logical given that advertising can often be more about framing than education. It appears that there is a base level of education about what to believe, and some base knowledge that helps people to make more rational choices even as the market encourages irrational decisions for present gain.
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