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Psychology in Economics and Business: An Introduction to Economic Psychology PDF

433 Pages·1996·6.04 MB·English
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PSYCHOLOGY IN ECONOMICS AND BUSINESS Psychology in Economics and Business An Introduction to Economic Psychology by GERRIT ANTONIDES With an Introduction by W. Fred van Raaij Second, Revised Edition KLUWER ACADEMIC PUBLISHERS DORDRECHT/BOSTON/LONDON Library of Congress Cataloging-in-Publication Data Antonides. Gerr1t. 1951- Psychology in economics and business: an introduction to economiC psychology I by Gerrit Antonides : with an introduction by W. Fred va~ Raaij. p. cm. Inc 1u des index. 1. Economics--Psychological aspects. 1. Title. HB74.P8A64 1996 330' .01' 9--dc20 96-19922 ISBN-13: 978-0-7923-4108-6 e-ISBN-13: 978-94-009-1710-1 DOl: 10.1 007/978-94-009-1710-1 Published by Kluwer Academic Publishers, P.O. Box 17,3300 AH Dordrecht, The Netherlands Kluwer Academic Publishers incorporates the publishing programmes of D. Reidel, Martinus Nijhoff, Dr. W. Junk and MTP Press. Sold and distributed in the U.S.A. and Canada by Kluwer Academic Publishers, 101 Philip Drive, Norwell, MA 02061, U.S.A. In all other countries, sold and distributed by Kluwer Academic Publishers Group, P.O. Box 322, 3300 AH Dordrecht, The Netherlands. Cover picture has been adapted from F. J. Gall and G. S. Spurzheim (18\0) in D. Krech et al.: Elements of Psychology. Copyright @1982 by Alfred A. Knopf. Reproduced by permission of McGraw-Hill, Inc. The idea expressed in the cover picture is that different kinds of behavior are controlled by separate parts of the brain. This hypothesis in phrenology is not assumed here but we assume that mental processes are involved in economic and social behavior as considered in this book. Printed 011 acid-free paper All Rights Reserved @1996 Kluwer Academic Publishers Softcover reprint of the hardcover 2nd edition 1996 No part of the material protected by this copyright notice may be reproduced or utilized in any f0n11 or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without written permission from the copyright owner. CONTENTS PREFACE IX 1. INTRODUCTION (by W. Fred van Raaij) PART I AN ECONOMIC PSYCHOLOGICAL PARADIGM 2. ECONOMICS AND PSYCHOLOGY 9 2.1. Shared interests of economics and psychology 9 2.2. Economic actions in everyday life 11 2.3. Relevance of psychology for economics 13 2.4. Economic psychological models of behavior 15 Box 2.1. Mental economics 21 3. MOTIVATION AND PERSONALITY 25 3.1. The function of motivation and personality in economic behavior 25 3.2. Need for achievement 28 3.3. Locus of control 33 3.4. Sensation seeking and risk attitude 35 3.5. Altruism 39 3.6. Time preference 42 3.7. Cognitive Style 45 3.8. Life-style 48 Box 3.1. Lee Iacocca 51 4. PERCEPTION 55 4.1. Psychophysics 55 Box 4.1. A psychophysical classroom experiment 59 4.2. Perceptual judgment 60 4.3. Price perception 64 4.4. Perception of money and inflation 66 v VI CONTENTS 4.5. Perception of economic activities and resources 69 4.6. Risk perception 73 Appendix 76 5. LEARNING 79 5.1. Introduction 79 5.2. Classical conditioning 80 5.3. Operant conditioning 83 504. Other types of learning 90 5.5. Economic socialization 92 5.6. A conflict model of buying behavior 94 Box 5.1. Token economy 98 6. ATTITUDE 101 6.1. Development of the attitude concept 101 6.2. Attitude and utility 105 6.3. Issues in attitude research 107 Box 6.1. Simplified choice in an information display 115 604. Images 117 6.5. The relation between attitudes and behavior 120 Box 6.2. Attitudes versus actions 123 7. LIMITED INFORMATION PROCESSING 127 7.1. Information processing in consumer decision making 127 7.2. Information processing capacity 129 Box 7.1. An inefficiency of short -term memory 133 7.3. Heuristics in information processing 135 Box 7.2. How to play better tennis? 140 7 A. Aspiration levels in information processing 143 7.5. Models of information processing 145 Box 7.3. Computer assisted decision making 150 8. ECONOMIC EXPECTATIONS AND INVESTMENT BEHAVIOR 154 8.1. Buying intentions 154 8.2. Expectations 156 8.3. Consumer confidence 157 804. Expectations regarding investments 162 8.5. Ethical investments 166 8.6. Initial public offerings 168 9. EMOTIONS 171 CONTENTS Vll 9.1. Introduction 171 9.2. Theories of emotion 174 9.3. Emotions and the utility function 179 904. Emotions and consumer choice 181 Box 9.1. Emotions in advertising 186 10. WELL-BEING 190 10.1. Introduction 190 10.2. Subjective well-being 197 10.3. Well-being and income 200 lOA. Poverty 206 10.5. Unemployment 208 10.6. Consumer satisfaction 210 PART II INFORMATION PROCESSING IN A WIDER SENSE 11. COGNITIVE CONSISTENCY 219 11.1. Introduction 219 11.2. Cognitive dissonance 221 11.3. Attribution theory 227 1104. Social judgment 234 Box 11.1. Attribution of political messages 240 12. RATIONALITY 245 12.1. Introduction 245 12.2. Axioms of economic choice 247 12.3. The shape of the value function 250 1204. Endowment effect 251 12.5. Mental accounting 253 12.6. Status quo bias 257 12.7. Sunk costs 258 12.8. Self-control 259 Box 12.1. A thought experiment on the endowment effect 265 13. CHOICE UNDER UNCERTAINTY 268 13.1. Expected utility 268 13.2. The certainty effect 270 13.3. The reflection effect 274 1304. The framing effect 275 13.5. Simplification in risky choice 279 viii CONTENTS Box 13.1. The St. Petersburg paradox 282 14. GAME THEORY 286 14.1. The Prisoner's Dilemma game 286 14.2. The N-persons Prisoner's Dilemma 289 14.3. Psychological variables in the Prisoner's Dilemma 293 14.4. Dynamic games 297 14.5. Other experimental games 302 15. NEGOTIATION 309 15.1. Introduction 309 15.2. The structure of negotiations 310 15.3. Strategies and tactics of negotiation 313 15.4. Psychological factors in negotiation behavior 318 15.5. Negotiation in market contexts 321 Box 15.1 A negotiation case 324 16. ECONOMIC PSYCHOLOGICAL METHODS 328 16.1. A classification of methods 328 16.2. Economic psychological methods 330 16.3. The validity of experiments 335 16.4. Experimental designs 342 16.5. Validity and reliability of observations 345 16.6. Questioning techniques 349 17. CONCLUSIONS 357 QUESTIONS 363 GLOSSARY 373 REFERENCES 393 AUTHOR INDEX 417 SUBJECT INDEX 425 PREFACE A number of books on economic psychology have appeared in the past few years. The most recent publications are Economic Psychology: Inter sections in Theory and Practice, I The Economic Mind,2 The Individual in the Economy3 and Handbook of Economic Psychologl. Why produce yet another book for this discipline? This question can be answered in various ways. In a sense, this book is the answer in itself. Its presentation of research and theories is innovative in this field, at least to my knowledge. It attempts to structure the many theories emerging in the interdisciplinary science of economic psychology and to explain the background of the research. The second answer is pragmatic. In our introductory course of economic psychology for economics students at Erasmus University Rotterdam we used several of the above mentioned books. Our experience with this material is that, when preparing our lectures, we had to collect many additional theories and experiments to present to our students. Furthermore, diagrams, figures and examples had to be culled from other sources or made by ourselves. It is not my intention to run down these publications since I think they provide an excellent treatment of a number of topics by specialists in economic psychology. The plan for the present book, however, emerged from our need to present an integrated introductory course for our students, showing the development of theories in economic psychology. In the fall of 1989, a draft version became available to our students to prepare them for their exam. One of the complaints we heard was: "Why has it not been written in Dutch?" The answer coincides with the third reason for this book. Economic psychology is a growing discipline and an increasing number of economists all over the world are becoming interested in psy chological factors in economic behavior. Since economists usually have no formal education in psychology, there may be a need for a presentation of psychological ideas with their application to economics. I hope that this book will satisfy this need to some extent. The organization of the book is such that the main psychological theories are dealt with in Chapters 2 to lO. With the exception of Chapter 11, the remaining chapters are not usually dealt with in psychology textbooks. Chap- IX x PREFACE ter 11 deals with several theories associated with cognitive consistency which I consider the counterpart of rationality in economics. Cognitive consistency deals with man's ability to pass judgments, to form and change attitudes and to interpret his environment, whilst still retaining consistency of opinions and beliefs. It is a guiding principle explaining many types of behavior dealt with in the other chapters. The structure of each chapter is such that one or two sections deal with the basic theory behind the issue. Several applications to economic behavior are considered in the remaining sections. Almost every chapter includes a box illustrating the chapter. Each section finishes with a conclusion and each chapter contains a summary. The glossary contains brief descriptions of the main concepts dealt with in the chapters. The main sources drawn on when compiling the chapters were thelournal ofE conomic Psychology, the annual colloquia of the International Association for Research in Economic Psychology, the books mentioned above and our own personal files. Acknowledgements First of all, I wish to thank Fred van Raaij for providing me with a great many valuable comments on the draft version of the book and for letting me use his document files. In addition, I also wish to thank him for writing the introduc tory chapter. Grateful thanks go to Peter Kaderjak for his comments on the draft version and to Marianne Warrnerdam for her assistance in compiling the glossary. Finally, I wish to express my gratitude to Caroline van Tienen who skilfully corrected the English. Preface to the second, revised edition The development of economic psychology, behavioral economics and ex perimental economics has been very fast during the past five years. This provides the main reason for the revision. About half the revision has been based on publications in thelournal ofE conomic Psychology which seems to attract an ever increasing number of authors with an economic background. Although having originally developed as a branch of psychology, economic psychology seems to becoming an interdisciplinary science. This is also evi dent from joint conferences of the International Association for Research in Economic Psychology (IAREP) on the one hand and the Society for the Ad vancement of Socio-Economics (SASE) in Stockholm, 1991, the Gesellschaft fUr Experimentelle Wirtschaftsforschung in Frankfurt, 1992 and the Society for the Advancement of Behavioral Economics in Shefayim, Israel, 1986 and Rotterdam, 1994, on the other. PREFACE Xl Several scientific trends in the field are apparent: There is an increasing interest in the economic psychology of financial behavior. This is evident from workshops held in Exeter, 1994 and Tilburg, 1993 and 1995. Also a growing field is experimental economics capturing a great vari ety of economic anomalies, such as deviations from game theoretic pre dictions, reference effects, endowment effects, status quo bias, mental accounting, self-control and time-inconsistent preferences. The ongoing series of 'Anomalies' in the Journal of Economic Perspectives is telling. A separately published volume of Anomalies appeared, titled The Winner's Curse.5 Although they have not yet reached the advanced stage of the areas men tioned above, the areas of economic socialization and economic percep tions also enjoy a growing interest. A fascinating and growing area is negotiation behavior. Unlike the area of game theory, the research here is mainly descriptive. The new research has been judged in the light of its contribution to eco nomic psychological theory rather than by its contribution to specific themes or problems. It has been included by adding paragraphs and sections and a new chapter has been devoted to negotiations. Applications of economic psychology to business are not yet impressive,6 probably due to the existence of organizational psychology, a separate branch of psychology. Applications to experimental economics are increasing in number, however, and we have tried to do them justice in this respect. Acknowledgements Grateful thanks go to Gary Bolton, Robert East, Shlomo Maital, Sharmila Ramadhin, Nico van der Sar and Harry Susianto for reviewing some material. I thank Linda Schijvens and Dennis Goedhart for their assistance in editing the revised edition. Once again, I express my gratitude to Caroline van Tienen for correcting the English. Notes I MacFadyen and MacFadyen 1986. 2 Fumham and Lewis 1986. 3 Lea et al. 1987. 4 Van Raaij et al. 1988. 5 Edited by Thaler 1992. 6 Van Witteloostuijn 1993.

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