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Behavioral Economics: When Psychology and Economics Collide PDF

188 Pages·2014·1.32 MB·English
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Topic Business Subtopic “Pure intellectual stimulation that can be popped into & Economics Economics the [audio or video player] anytime.” —Harvard Magazine B Behavioral Economics: “Passionate, erudite, living legend lecturers. Academia’s e h best lecturers are being captured on tape.” a v —The Los Angeles Times io When Psychology r a l E “A serious force in American education.” c o and Economics Collide —The Wall Street Journal n o m i c s 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. THE GREAT COURSES® Corporate Headquarters 4840 Westfields Boulevard, Suite 500 Chantilly, VA 20151-2299 USA G Phone: 1-800-832-2412 u www.thegreatcourses.com id e Professor Photo: © Jeff Mauritzen - inPhotograph.com. b Cover Image: © exdez/iStock Vectors/Getty Images. o o Course No. 5532 © 2014 The Teaching Company. PB5532A k PUBLISHED BY: THE GREAT COURSES Corporate Headquarters 4840 Westfields Boulevard, Suite 500 Chantilly, Virginia 20151-2299 Phone: 1-800-832-2412 Fax: 703-378-3819 www.thegreatcourses.com Copyright © The Teaching Company, 2014 Printed in the United States of America This book is in copyright. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior written permission of 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. ■ iiii 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 iii 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 iv Table of Contents LECTURE 24 Interventions, Nudges, and Decisions ............................................165 SUPPLEmENTaL maTERIaL Bibliography ....................................................................................173 v vi 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 1 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 e op charitable giving and cooperation, each of which arises in ways that aren’t c S predicted by traditional economic models but are predictable from new 22

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