Behavioral Economics: When Psychology and Economics Collide

188 Pages·2014·1.32 MB·English

by  Scott Huettel

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Course Guidebook
Professor Scott Huettel
Duke University
Professor Scott Huettel is the Jerry G. and Patricia Crawford
Hubbard Professor in the Department of Psychology and
Neuroscience at Duke University. He received his Ph.D.
from Duke in Experimental Psychology and completed a
postdoctoral fellowship in functional brain imaging and
decision science at the university’s medical center. He is also
the founding Director of the Duke Center for Interdisciplinary
Decision Science. Professor Huettel is a leading researcher at
the intersection of behavioral economics and neuroscience;
his work has been published in Science and featured on CNN,
in Newsweek, and in many other media outlets.
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Course No. 5532 © 2014 The Teaching Company. PB5532A k
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The Teaching Company.
Scott Huettel, Ph.D.
Jerry G. and Patricia Crawford Hubbard
Professor of Psychology and Neuroscience
Duke University
Professor Scott Huettel is the Jerry G. and
Patricia Crawford Hubbard Professor in the
Department of Psychology and Neuroscience
at Duke University, where he has taught since 2002.
He graduated with honors from The University of
Texas at Austin, with a B.A. in Liberal Arts Honors
and Psychology. Professor Huettel received his Ph.D. from Duke University
in Experimental Psychology and completed a postdoctoral fellowship in
functional brain imaging and decision science at Duke University Medical
Center. He has appointments in a number of interdisciplinary units at Duke,
including secondary appointments in the departments of Psychiatry and
Neurobiology. In addition, he is the founding Director of the Duke Center
for Interdisciplinary Decision Science (D-CIDES), which brings together
faculty and students from across campus for interdisciplinary research and
educational programs. Professor Huettel is a recipient of the Dean’s Award
for Excellence in Mentoring from the Duke University Graduate School
and has been recognized as one of the top five percent of undergraduate
instructors at Duke.
Professor Huettel is a leading researcher at the intersection of behavioral
economics and neuroscience. His laboratory uses a combination of
behavioral, genetic, physiological, and neuroscience techniques to discover
the neural mechanisms that underlie higher cognition, with a focus on
economic and social decision making. Much of his research—which
includes collaborations with neuroscientists, psychologists, behavioral
economists, and business and medical faculty—falls within the emerging
interdiscipline of neuroeconomics. He is also a Past President of the Society
for Neuroeconomics.
Professor Huettel is the author of more than 100 scientific publications,
including articles in Science, Nature Neuroscience, Nature Reviews
i
Neuroscience, Neuron, Psychological Science, and other top journals
in several fields. His research has been featured in many media outlets,
including CNN, Newsweek, Money magazine, and NPR’s Science Friday.
Professor Huettel is the lead author of a primary textbook in neuroscience,
Functional Magnetic Resonance Imaging, and is a coeditor of the textbook
Principles of Cognitive Neuroscience. ■
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Table of Contents
INTRODUCTION
Professor Biography ............................................................................i
Course Scope .....................................................................................1
LECTURE GUIDES
LECTURE 1
What Is a Good Decision? ..................................................................4
LECTURE 2
The Rise of Behavioral Economics...................................................11
LECTURE 3
Reference Dependence—It’s All Relative .........................................18
LECTURE 4
Reference Dependence—Economic Implications ............................25
LECTURE 5
Range Effects—Changing the Scale ................................................32
LECTURE 6
Probability Weighting ........................................................................39
LECTURE 7
Risk—The Known Unknowns ...........................................................46
LECTURE 8
Ambiguity—The Unknown Unknowns ..............................................53
LECTURE 9
Temporal Discounting—Now or Later? .............................................60
LECTURE 10
Comparison—Apples and Oranges ..................................................67
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Table of Contents
LECTURE 11
Bounded Rationality—Knowing Your Limits .....................................74
LECTURE 12
Heuristics and Biases .......................................................................81
LECTURE 13
Randomness and Patterns ...............................................................88
LECTURE 14
How Much Evidence Do We Need? .................................................95
LECTURE 15
The Value of Experience ................................................................102
LECTURE 16
Medical Decision Making ................................................................109
LECTURE 17
Social Decisions—Competition and Coordination ..........................116
LECTURE 18
Group Decision Making—The Vox Populi ......................................123
LECTURE 19
Giving and Helping—Why Altruism?...............................................130
LECTURE 20
Cooperation by Individuals and in Societies ...................................137
LECTURE 21
When Incentives Backfire ...............................................................144
LECTURE 22
Precommitment—Setting Rationality Aside ....................................151
LECTURE 23
Framing—Moving to a Different Perspective .................................158
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Table of Contents
LECTURE 24
Interventions, Nudges, and Decisions ............................................165
SUPPLEmENTaL maTERIaL
Bibliography ....................................................................................173
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Behavioral Economics:
When Psychology and Economics Collide
Scope:
We all face difficult decisions: which new car to purchase, where
to go to college, whether to take that dream vacation now or save
more for retirement. Traditional economic models of decision
making assume that people make those decisions in what is often called a
rational manner—they weigh the costs and benefits of different outcomes,
evaluate the future with patience and foresight, and acquire the appropriate
information to make a good decision. These models have been extraordinarily
powerful for predicting large-scale economic phenomena in a wide range of
settings: how consumers respond to price changes, how voters react to new
information, and many others.
Traditional economic models work extremely well—except when they
don’t. In some situations, people make decisions that seem to violate the
foundational assumptions of rational choice models. Sometimes monetary
incentives decrease people’s likelihood to take an action, and sometimes
additional choice options lead people to make worse decisions. Over the
past half-century, decision scientists have identified anomalies, or biases, in
people’s behavior that can’t readily be explained with traditional economic
models. This research has sparked a new field of inquiry now called
behavioral economics that integrates economics and psychology—and,
recently, neuroscience—toward the goal of better explaining real-world
decision making.
This course will provide a systematic introduction to the rapidly changing
field of behavioral economics. It will consider how behavioral economics
adopts traits from its parent disciplines of economics and psychology
but combines them into a new approach for studying decision making. It
will explore a remarkable range of counterintuitive and sometimes even
paradoxical aspects of human behavior, often revealing that our decisions
are based on completely unexpected factors. It won’t, however, lose track
of the underlying science. Each topic remains in close contact with the
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research that experts in the field pursue, and each topic builds to concrete
recommendations so that you can understand why we have these biases,
what purposes they serve, and how you can turn them to your advantage.
This course begins by exploring the history of behavioral economics,
starting with the first recognition that concepts from psychology could
actually contribute to the understanding of meaningful economic decisions.
It will cover some of the foundational principles of behavioral economics,
as encapsulated in the seminal work of pioneers like Daniel Kahneman
and Amos Tversky, who created prospect theory. To understand those
foundational principles, you will work your way from basic properties of
how our brains work, through the psychology of motivation, all the way to
our consumer choices in the real world. In addition, you will explore the key
motivators for our decisions—factors like probability, risk, reward, and the
passage of time—and how we integrate those factors to reach decisions.
The decision process, however, begins well before the moment of choice.
So, you will consider what happens before decisions get made by looking at
how people acquire information, strategize about the decision process, and
simplify complex decisions to something more manageable. You will step
back in time to consider the discoveries of Herbert Simon, who developed
the idea of bounded rationality, and you will step forward to the latest
research on how people use their emotions to shortcut complex decision
making. You will explore the nature of randomness, why we see patterns
that aren’t there, the mistakes we make even when trying to be impartial,
and when our experiences aren’t necessarily a good guide. In addition, you
will explore some underappreciated consequences of our decisions—why
we might overvalue things and undervalue experiences and how our sense of
self factors into our medical decisions.
You will explore how groups make decisions. Often, a group can reach
accurate judgments and make excellent decisions, especially when that
group’s members are diverse and independent. However, small changes to
how groups are formed and how they communicate can make groups much
worse than the individuals therein. You will consider prosocial decisions like
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op charitable giving and cooperation, each of which arises in ways that aren’t
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S predicted by traditional economic models but are predictable from new
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