Advances in Behavioral Economics - Brossura

Camerer, Colin F.

Brossura

ISBN 10: 0691116822 ISBN 13: 9780691116822

Casa editrice: Princeton Univ Pr, 2003

Riassunto

Twenty years ago, behavioral economics did not exist as a field. Most economists were deeply skeptical--even antagonistic--toward the idea of importing insights from psychology into their field. Today, behavioral economics has become virtually mainstream. It is well represented in prominent journals and top economics departments, and behavioral economists, including several contributors to this volume, have garnered some of the most prestigious awards in the profession.


This book assembles the most important papers on behavioral economics published since around 1990. Among the 25 articles are many that update and extend earlier foundational contributions, as well as cutting-edge papers that break new theoretical and empirical ground.



Advances in Behavioral Economics will serve as the definitive one-volume resource for those who want to familiarize themselves with the new field or keep up-to-date with the latest developments. It will not only be a core text for students, but will be consulted widely by professional economists, as well as psychologists and social scientists with an interest in how behavioral insights are being applied in economics.


The articles, which follow Colin Camerer and George Loewenstein's introduction, are by the editors, George A. Akerlof, Linda Babcock, Shlomo Benartzi, Vincent P. Crawford, Peter Diamond, Ernst Fehr, Robert H. Frank, Shane Frederick, Simon Gächter, David Genesove, Itzhak Gilboa, Uri Gneezy, Robert M. Hutchens, Daniel Kahneman, Jack L. Knetsch, David Laibson, Christopher Mayer, Terrance Odean, Ted O'Donoghue, Aldo Rustichini, David Schmeidler, Klaus M. Schmidt, Eldar Shafir, Hersh M. Shefrin, Chris Starmer, Richard H. Thaler, Amos Tversky, and Janet L. Yellen.

Su questo libro

Informazioni sull?autore

Colin F. Camerer is Rea A. and Lela G. Axline Professor of Business Economics at the California Institute of Technology. He is the author of Behavioral Game Theory (Princeton). George Loewenstein is Professor of Economics and Psychology at Carnegie Mellon University. Matthew Rabin, Professor of Economics at the University of California, Berkeley, received the John Bates Clark Medal of the American Economics Association for 2001.

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Advances in Behavioral Economics

PRINCETON UNIVERSITY PRESS

Copyright © 2004 Russell Sage Foundation
All right reserved.
ISBN: 978-0-691-11682-2

Contents

LIST OF CONTRIBUTORS..........................................................................................................................................................xiPREFACE.......................................................................................................................................................................xxiACKNOWLEDGMENTS...............................................................................................................................................................xxvPART ONE: INTRODUCTION........................................................................................................................................................1CHAPTER ONE Behavioral Economics: Past, Present, Future Colin F. Camerer and George Loewenstein..............................................................................3PART TWO: BASIC TOPICS........................................................................................................................................................53CHAPTER TWO Experimental Tests of the Endowment Effect and the Coase Theorem Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler.........................................55CHAPTER THREE Mental Accounting Matters Richard H. Thaler....................................................................................................................75CHAPTER FOUR Developments in Nonexpected-Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk Chris Starmer................................................104CHAPTER FIVE Prospect Theory in the Wild: Evidence from the Field Colin F. Camerer...........................................................................................148CHAPTER SIX Time Discounting and Time Preference: A Critical Review Shane Frederick, George Loewenstein, and Ted O'Donoghue..................................................162CHAPTER SEVEN Doing It Now or Later Ted O'Donoghue and Matthew Rabin.........................................................................................................223CHAPTER EIGHT Fairness as a Constraint on Profit Seeking: Entitlements in the Market Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler.................................252CHAPTER NINE A Theory of Fairness, Competition, and Cooperation Ernst Fehr and Klaus M. Schmidt..............................................................................271CHAPTER TEN Incorporating Fairness into Game Theory and Economics Matthew Rabin..............................................................................................297CHAPTER ELEVEN Explaining Bargaining Impasse: The Role of Self-Serving Biases Linda Babcock and George Loewenstein...........................................................326CHAPTER TWELVE Theory and Experiment in the Analysis of Strategic Interaction Vincent P. Crawford............................................................................344CHAPTER THIRTEEN Behavioral Game Theory: Predicting Human Behavior in Strategic Situations Colin F. Camerer..................................................................374PART THREE: APPLICATIONS......................................................................................................................................................393CHAPTER FOURTEEN Mental Accounting, Saving, and Self-Control Hersh M. Shefrin and Richard H. Thaler..........................................................................395CHAPTER FIFTEEN Golden Eggs and Hyperbolic Discounting David Laibson.........................................................................................................429CHAPTER SIXTEEN The Fair Wage-Effort Hypothesis and Unemployment George A. Akerlof and Janet L. Yellen.......................................................................458CHAPTER SEVENTEEN Money Illusion Eldar Shafir, Peter Diamond, and Amos Tversky...............................................................................................483CHAPTER EIGHTEEN Fairness and Retaliation: The Economics of Reciprocity Ernst Fehr and Simon Gchter.........................................................................510CHAPTER NINETEEN Labor Supply of New York City Cab Drivers: One Day at a Time Colin F. Camerer, Linda Babcock, George Loewenstein, and Richard H. Thaler.....................533CHAPTER TWENTY Wages, Seniority, and the Demand for Rising Consumption Profiles Robert H. Frank and Robert M. Hutchens.......................................................548CHAPTER TWENTY-ONE Incentives, Punishment, and Behavior Uri Gneezy and Aldo Rustichini.......................................................................................572CHAPTER TWENTY-TWO Myopic Loss-Aversion and the Equity Premium Puzzle Shlomo Benartzi and Richard H. Thaler..................................................................590CHAPTER TWENTY-THREE Do Investors Trade Too Much? Terrance Odean.............................................................................................................606CHAPTER TWENTY-FOUR Loss-Aversion and Seller Behavior: Evidence from the Housing Market David Genesove and Christopher Mayer..................................................633PART FOUR: NEW FOUNDATIONS....................................................................................................................................................657CHAPTER TWENTY-FIVE Case-Based Decision Theory Itzhak Gilboa and David Schmeidler............................................................................................659CHAPTER TWENTY-SIX Out of Control: Visceral Influences on Behavior George Loewenstein........................................................................................689INDEX.........................................................................................................................................................................725

Chapter One

Behavioral Economics: Past, Present, Future

COLIN F. CAMERER AND GEORGE LOEWENSTEIN

Behavioral economics increases the explanatory power of economics by providing it with more realistic psychological foundations. This book consists of representative recent articles in behavioral economics. Chapter 1 is intended to provide an introduction to the approach and methods of behavioral economics, and to some of its major findings, applications, and promising new directions. It also seeks to fill some unavoidable gaps in the chapters' coverage of topics.

What Behavioral Economics Tries to Do

At the core of behavioral economics is the conviction that increasing the realism of the psychological underpinnings of economic analysis will improve the field of economics on its own terms-generating theoretical insights, making better predictions of field phenomena, and suggesting better policy. This conviction does not imply a wholesale rejection of the neoclassical approach to economics based on utility maximization, equilibrium, and efficiency. The neoclassical approach is useful because it provides economists with a theoretical framework that can be applied to almost any form of economic (and even noneconomic) behavior, and it makes refutable predictions. Many of these predictions are tested in the chapters of this book, and rejections of those predictions suggest new theories.

Most of the papers modify one or two assumptions in standard theory in the direction of greater psychological realism. Often these departures are not radical at all because they relax simplifying assumptions that are not central to the economic approach. For example, there is nothing in core neoclassical theory that specifies that people should not care about fairness, that they should weight risky outcomes in a linear fashion, or that they must discount the future exponentially at a constant rate. Other assumptions simply acknowledge human limits on computational Stigler (1965) says economic theories should be judged by three criteria: congruence with reality, generality, and tractability. Theories in behavioral economics should be judged this way too. We share the modernist view that the ultimate test of a theory is the accuracy with which it identifies the actual causes of behavior; making accurate predictions is a big clue that a theory has pinned down the right causes, but more realistic assumptions are surely helpful too.

Theories in behavioral economics also strive for generality-e.g., by adding only one or two parameters to standard models. Particular parameter values then often reduce the behavioral model to the standard one, and the behavioral model can be pitted against the standard model by estimating parameter values. Once parameter values are pinned down, the behavioral model can be applied just as widely as the standard one.

Adding behavioral assumptions often does make the models less tractable. However, many of the papers represented in this volume show that it can be done. Moreover, despite the fact that they often add parameters to standard models, behavioral models, in some cases, can be even more precise than traditional ones that assume more rationality, when there is dynamics and strategic interaction. Thus, Lucas (1986) noted that rational expectations allow for multiple inflationary and asset price paths in dynamic models, while adaptive expectations pin down one path. The same is true in game theory: Models based on cognitive algorithms (Camerer, Ho, and Chong 2003) often generate precise predictions in those games where the mutual consistency requirement of Nash permits multiple equilibria.

The realism, generality, and tractability of behavioral economics can be illustrated with the example of loss-aversion. Loss-aversion is the disparity between the strong aversion to losses relative to a reference point and the weaker desire for gains of equivalent magnitude. Loss aversion is more realistic than the standard continuous, concave, utility function over wealth, as demonstrated by hundreds of experiments. Loss aversion has proved useful in identifying where predictions of standard theories will go wrong: Loss-aversion can help account for the equity premium puzzle in finance and asymmetry in price elasticities. (We provide more examples further on.) Loss aversion can also be parameterized in a general way, as the ratio of the marginal disutility of a loss relative to the marginal utility of a gain at the reference point (i.e., the ratio of the derivatives at zero); the standard model is the special case in which this "loss-aversion coefficient" is 1. As the foregoing suggests, loss-aversion has proved tractable-although not always simple-in several recent applications (Barberis, Huang, and Santos 2001).

The Historical Context of Behavioral Economics

Most of the ideas in behavioral economics are not new; indeed, they return to the roots of neoclassical economics after a century-long detour. When economics first became identified as a distinct field of study, psychology did not exist as a discipline. Many economists moonlighted as the psychologists of their times. Adam Smith, who is best known for the concept of the "invisible hand" and The Wealth of Nations, wrote a less well-known book, The Theory of Moral Sentiments, which laid out psychological principles of individual behavior that are arguably as profound as his economic observations. The book is bursting with insights about human psychology, many of which presage current developments in behavioral economics. For example, Adam Smith commented (1759/1892, 311) that "we suffer more ... when we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better." Loss aversion! Jeremy Bentham, whose utility concept formed the foundation of neoclassical economics, wrote extensively about the psychological underpinnings of utility, and some of his insights into the determinants of utility are only now starting to be appreciated (Loewenstein 1999). Francis Edgeworth's Theory of Mathematical Psychics introduced his famous "box" diagram showing two-person bargaining outcomes and included a simple model of social utility, in which one person's utility was affected by another person's payoff, which is a springboard for modern theories (see chapters 9 and 10 of this volume-Advances in Behavioral Economics-for two examples).

The rejection of academic psychology by economists, perhaps somewhat paradoxically, began with the neoclassical revolution, which constructed an account of economic behavior built up from assumptions about the nature-that is, the psychology-of homo economicus. At the turn of the twentieth century, economists hoped that their discipline could be like a natural science. Psychology was just emerging at that time and was not very scientific. The economists thought it provided too unsteady a foundation for economics. Their distaste for the psychology of their period, as well as their dissatisfaction with the hedonistic assumptions of Benthamite utility, led to a movement to expunge the psychology from economics.

The expunging of psychology from economics happened slowly. In the early part of the twentieth century, the writings of economists such as Irving Fisher and Vilfredo Pareto still included rich speculations about how people feel and think about economic choices. Later, John Maynard Keynes appealed frequently to psychological insights, but by the middle of the century discussions of psychology had largely disappeared.

Throughout the second half of the century, many criticisms of the positivistic perspective took place in both economics and psychology. In economics, researchers like George Katona, Harvey Leibenstein, Tibor Scitovsky, and Herbert Simon wrote books and articles suggesting the importance of psychological measures and bounds on rationality. These commentators attracted attention but did not alter the fundamental direction of economics.

Many coincidental developments led to the emergence of behavioral economics as represented in this book. One development was the rapid acceptance by economists of the expected utility and discounted utility models as normative and descriptive models of decision making under uncertainty and intertemporal choice, respectively. Whereas the assumptions and implications of generic utility analysis are rather flexible, and hence tricky to refute, the expected utility and discounted utility models have numerous precise and testable implications. As a result, they provided some of the first "hard targets" for critics of the standard theory. Seminal papers by Allais (1953), Ellsberg (1961), and Markowitz (1952) pointed out anomalous implications of expected and subjective expected utility. Strotz (1955) questioned exponential discounting. Later scientists demonstrated similar anomalies using compelling experiments that were easy to replicate (Kahneman and Tversky 1979, on expected utility; Thaler 1981, and Loewenstein and Prelec 1992, on discounted utility).

As economists began to accept anomalies as counterexamples that could not be permanently ignored, developments in psychology identified promising directions for new theory. Beginning around 1960, cognitive psychology became dominated by the metaphor of the brain as an information-processing device, which replaced the behaviorist conception of the brain as a stimulus-response machine. The information-processing metaphor permitted a fresh study of neglected topics like memory, problem solving and decision making. These new topics were more obviously relevant to the neoclassical conception of utility maximization than behaviorism had appeared to be. Psychologists such as Ward Edwards, Duncan Luce, Amos Tversky, and Daniel Kahneman began to use economic models as a benchmark against which to contrast their psychological models. Perhaps the two most influential contributions were published by Tversky and Kahneman. Their 1974 Science article argued that heuristic short-cuts created probability judgments that deviated from statistical principles. Their 1979 paper "Prospect theory: Decision making under risk" documented violations of expected utility and proposed an axiomatic theory, grounded in psychophysical principles, to explain the violations. The latter was published in the technical journal Econometrica and is one of the most widely cited papers ever published in that journal.

A later milestone was the 1986 conference at the University of Chicago, at which an extraordinary range of social scientists presented papers (see Hogarth and Reder 1987). Ten years later, in 1997, a special issue of the Quarterly Journal of Economics was devoted to behavioral economics (three of those papers are reprinted in this volume).

Early papers established a recipe that many lines of research in behavioral economics have followed. First, identify normative assumptions or models that are ubiquitously used by economists, such as Bayesian updating, expected utility, and discounted utility. Second, identify anomalies-i.e., demonstrate clear violations of the assumption or model, and painstakingly rule out alternative explanations, such as subjects' confusion or transactions costs. And third, use the anomalies as inspiration to create alternative theories that generalize existing models. A fourth step is to construct economic models of behavior using the behavioral assumptions from the third step, derive fresh implications, and test them. This final step has only been taken more recently but is well represented in this volume of advances.

The Methods of Behavioral Economics

The methods used in behavioral economics are the same as those in other areas of economics. At its inception, behavioral economics relied heavily on evidence generated by experiments. More recently, however, behavioral economists have moved beyond experimentation and embraced the full range of methods employed by economists. Most prominently, a number of recent contributions to behavioral economics, including several included in this book (chapters 21, 25, and 26, and studies discussed in chapters 7 and 11) rely on field data. Other recent papers utilize methods such as field experiments (Gneezy and Rustichini, in this volume) computer simulation (Angeletos et al. 2001), and even brain scans (McCabe et al. 2001).

Experiments played a large role in the initial phase of behavioral economics because experimental control is exceptionally helpful for distinguishing behavioral explanations from standard ones. For example, players in highly anonymous one-shot take-it-or-leave-it "ultimatum" bargaining experiments frequently reject substantial monetary offers, ending the game with nothing (see Camerer and Thaler 1995). Offers of 20% or less of a sum are rejected about half the time, even when the amount being divided is several weeks' wages or $400 (U.S.) (Camerer 2003). Suppose we observed this phenomenon in the field, in the form of failures of legal cases to settle before trial, costly divorce proceedings, and labor strikes. It would be difficult to tell whether rejection of offers was the result of reputation-building in repeated games, agency problems (between clients and lawyers), confusion, or an expression of distaste for being treated unfairly. In ultimatum game experiments, the first three of these explanations are ruled out because the experiments are played once anonymously, have no agents, and are simple enough to rule out confusion. Thus, the experimental data clearly establishes that subjects are expressing concern for fairness. Other experiments have been useful for testing whether judgment errors that individuals commonly make in psychology experiments also affect prices and quantities in markets. The lab is especially useful for these studies because individual and market-level data can be observed simultaneously (Camerer 1987; Ganguly, Kagel, and Moser 2000).

Although behavioral economists initially relied extensively on experimental data, we see behavioral economics as a very different enterprise from experimental economics (see Loewenstein 1999). As noted, behavioral economists are methodological eclectics. They define themselves not on the basis of the research methods that they employ but rather on their application of psychological insights to economics. Experimental economists, on the other hand, define themselves on the basis of their endorsement and use of experimentation as a research tool. Consistent with this orientation, experimental economists have made a major investment in developing novel experimental methods that are suitable for addressing economic issues and have achieved a virtual consensus among themselves on a number of important methodological issues.

This consensus includes features that we find appealing and worthy of emulation (see Hertwig and Ortmann, 2001). For example, experimental economists often make instructions and software available for precise replication, and raw data are typically archived or generously shared for reanalysis. Experimental economists insist on paying performance-based incentives, which reduces response noise (but does not typically improve rationality; see Camerer and Hogarth 1999), and also have a prohibition against deceiving subjects.

(Continues...)

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Dettagli dell?edizione

• Editore: Princeton Univ Pr
• Data di pubblicazione: 2003
• Lingua: Inglese
• ISBN 10: 0691116822
• ISBN 13: 9780691116822
• Rilegatura: Copertina flessibile
• Numero di pagine: 776
• Redattore: Loewenstein George, Rabin Matthew
• Contatto del produttore: non disponibile
• Persona responsabile: non disponibile