2.1. Cognitive factors - Psychology of economic behavior

2.1.1. Making an economic decision

The greatest attention in the polemics of economists and psychologists about the rationality of economic activity and behavior was focused on the problem of making economic decisions. Investing money in a business, choosing a profession or an educational institution, changing areas, cities or countries of residence are associated with making a decision in the absence of certain information about the result.

Uncertainty remains constant, sometimes the dominant feature of the human condition.

The economic view on making a decision comes down to two questions: "What is the value of this?" and "What should I give for it?" Hence the choice between this or that, "now" or "later." When the choice is made

between certain alternatives, it suffices to describe the options for themselves with the words "better than", "worse than", or "the same."

But in human behavior is not so simple. Let us turn, for example, to the axiom of "greed" presented in the theory of demand: "If basket A contains the same goods as basket B, but at least one unit of one good is more, then A will always be preferred to B".

The task

Give examples of a non-rational, from an economic point of view, choice that refutes the axiom of "greed." Analyze the situation and explain the reasons for irrational behavior.

In the response, behaviors can be used that dominate social desirability, that is, the desire to look better in the eyes of others and to refuse a larger prize, a “better piece” because of good breeding, chivalry or modesty, etc.

Often the choice is made in a situation where what can be chosen is not the only definite result, but two or more different possibilities, each of which has its own probability, for example, deciding whether to buy a lottery ticket or not, or a decision that requires the calculation of time and money losses, taken in a situation where a person is late for an important business meeting, a date. In this case, it is no longer enough just to compare alternatives, it is necessary to determine the numerical value of "happiness" or benefit, evaluating each option.

The grounds for studying probabilistic economic behavior were laid by the economist Oscar Mongershtein and the mathematician John von Neumann in his book The Theory of Games and Economic Behavior (1944) ³ . The authors show an inherent tendency of economists to exaggerate, absolutizing cognitive components. They view the decision maker as rational, consistent, whose main goal is profit, and the main principle of activity is to maximize it. Let us turn for example to the two axioms proposed by the authors.

2.1.2. The volatility of choice and the attractiveness of certainty

Transitivity (constancy) axiom: "If you prefer B and B prefer C, then you should A prefer C (for example, if you prefer fragrant almonds over walnuts and nuts over chocolate, then you should prefer almonds over chocolate)."

Facing the opposite cases, economists proceeded in their explanation from the fact that theory requires consistency, and people are imperfect, they make mistakes. Psychologists believe that people are constantly impermanent. Their preferences tend to be non-transitive, but deviate from constancy in a systematic way that can be measured, explained and studied.

Experiments have shown that even the next weaker version of transitivity does not occur: "If you prefer A most of the time, and B prefer C most of the time, then you must A in most cases prefer C". Indeed, for various reasons (the influence of other people, fashion, the desire for novelty, savings, etc.) a person can drastically change his preferences.

Substitution axiom: "If one event is preferred to another, when both of them have a 100% probability, the same event should be preferred under conditions of uncertainty, when both events are equally uncertain (or the same ratio of their probabilities)." Thus, if you prefer a certain outcome A to a certain outcome B, then you should prefer the chance to win A to the chance to win B.

This axiom of substitution contradicts the proverbial wise expression of Cervantes four hundred years ago that the bird in the hand is better than the crane in the sky. Consider the examples of tasks.

Tasks:

1. What would you prefer: 100% chance of spending a week of vacation in England or a 50% chance to win a three-week tour of England, France and Italy?

2. Would you rather prefer a 10% chance of winning one week vacation in England or a 5% chance of winning a three-week tour of England, France and Italy?

Compare your choice in tasks 1 and 2. Has the replacement axiom been preserved? Why do 8 out of 10 choose the first alternative in task 1 and, on the contrary, 7 out of 9 choose the second alternative in task 2?

Confirmation of the axiom would be the same choice. However, the majority chooses England in the first case, and a more attractive option with a visit to the three countries in the low-chance game proposed in the second case.

Cervantes argued that certainty has special power. Indeed, many consider reliable winnings to be more valuable than unreliable, although more attractive. And if both are risky, you should choose the one that is bigger or more interesting.

Confirmation of the axiom would be the same choice. However, the majority chooses England in the first case, and a more attractive option with a visit to the three countries in the game with low chances, proposed in the second case.

Cervantes argued that certainty has special power. Indeed, many consider reliable winnings to be more valuable than unreliable, although more attractive. And if both are risky, you should choose the one that is bigger or more interesting.

2.1.3. Selection and calculation

How do people choose probabilities? Many do not like calculations and use approximate guesses. Experiments have shown that very few people can and want to combine the probabilities of independent events by multiplying. None of the 143 students in the experiments of Amos Tversky knew this law.

Under uncertainty, a person can behave like an intellectual cripple. The following main types of systematic errors made in assessing probabilities are known:

* representativeness effect (reliability of small samples is overestimated);

* visual effect (reassessment of the probabilities of bright, memorable events);

* the effect of self-centeredness (insufficient consideration of a priori information and the use of mostly their own experience);

* effect of conservatism;

* Irwin effect (the probability of the desired event is overestimated and the probability of the undesirable is underestimated);

* anchor effect (the influence of the reference point, with which it is compared);

* the effect of the edge (the possibility of probable events is underestimated and overestimated - unlikely);

* Monte Carlo effect (when assessing the probabilities of two consecutive independent events, people tend to establish a connection between them);

* Stoner effect (positive risk shift in group decisions in relation to individual).

Tasks:

1. Think about the effect of insurance companies?

2. What effect was manifested in the mass risk of investors in MMM?

3. What is the effect that states the fact of increasing the risk in the group as opposed to the individual?

4. What effect is illustrated by the typical logical error contained in the expression post hos ergo propter hos (after this, therefore because of this)?

5. To what effect does the bankrupt company appeal, persuading the depositors not to bring the matter of paying their debt to the court, because in this case, they say, they will get at least something?

6. What is the effect of neglecting constant warnings not to get involved with riffraff?

In response, the edge effect, the Irving effect, the Stone effect, the Monte Carlo effect, the anchor effect, the egocentric effect should be used.

Since, in economic behavior, people do not always produce a probabilistic calculation, it should be borne in mind that selection tasks, where the risk is pre-calculated, will cause different behaviors than those in which people calculate independently.

In economics, it is often stated that in many economic situations, people who are more capable of rational calculations have an advantage over people who are unobservant, inhibited, or are inclined to make decisions under the influence of impulse. At the same time, an intuitive approach in estimating probabilities may be a manifestation of time deficit or energy savings.

So, people take into account the probability of events, and certainty is desired by itself, but in different situations, uncertainty, risk, probability of events are perceived differently. In search of the psychological reasons for the impermanence of economic decisions, the influence on the riskiness of the choice of its conditions and context was revealed.

2.1.4. Risk and win or lose

In real life, the willingness to take risks depends on whether we risk to achieve any gain, acquisition, or avoid any loss.

Tasks:

1. Imagine that you have a choice between a 90% chance to win $ 3,000 and a 45% chance to win twice as much as $ 6,000, what do you choose?

2. Choose between a 90% chance of losing $ 3,000 and a 45% chance of losing $ 6,000. What is your choice?

In the first case, 6 times more people choose a smaller, but more likely gain, although the mathematically expected value (probability of winning options) of each game is the same - $ 2,700.

In the second task, on the contrary, 9 out of 10 prefer to risk a larger but less likely loss. Obviously, people do not like to risk because of a win, but they prefer to risk because of a loss. This is a general pattern, but it may change under the influence of the specifics of the activity and individual characteristics.

Economists explain this pattern, based on the basic principle of the economy: a consistent increase in income brings less and less satisfaction or benefits. Therefore, for example, with an equiprobable chance, a gain of $ 1,000 adds less satisfaction than it takes a loss of $ 1,000.

Here it is possible to apply a purely psychological explanation: everything that a person possesses is included in his image of “I” (this also applies to the material sphere), and the loss dooms him to psychological trauma, whereas for the sake of which you still have to risk it is perceived as someone else, though welcome.

2.1.5. The choice and method of presenting its conditions

The way people make risky choices can have a big impact on their final decision. J. von Neumann and O. Mongerstein asserted that the way in which elections are proposed does not matter.

Tasks:

1. Imagine that you decided to watch a play, a ticket for which costs $ 10. Approaching the theater, you discovered that you lost a $ 10 bill.

Did you decide nevertheless to buy a ticket for $ 10 and see the play?

(The answer is "Yes" - 86%).

2. Imagine that you decided to watch the play and paid $ 10 for the entrance ticket. Approaching the theater, you discovered that you had lost the ticket. Your seat has not been registered, and the ticket cannot be restored.

Will you pay $ 10 for a new ticket?

(The answer is "Yes" - 46%).

Explain what caused the difference in decision making.

A. Tversky and D. Kaneman wrote about the “framework” of the decision, which refers to the ideas of the person making the decision on the actions, results and unforeseen circumstances related to a particular choice ⁴ . The framework set by a person when making a decision depends on the formulation of the problem, as well as on its norms, habits and personal characteristics.

2.1.6. Psychological costs of economic decisions

As we see, economic behavior is much more complicated than it appears in the works of J. von Neumann and O. Mongerstein in neoclassical economic theories ⁵ . It is determined by many factors and cannot be axiomatically described and unambiguously predicted. Rational behavior, rational choice is only one of the behaviors. Economists - representatives of institutional theories of the firm and consumer demand - seek to take into account the influence of psychological factors on economic decisions and relationships. Including psychological components in models of economic behavior, they managed to go beyond the simplified scheme of "economic man."

The works of the Nobel Prize winners G. Simon (author of the company's behavioral theory), K. Arrow and J. Buchanan (creators of the theory of public choice), H. Leibenstan, who made a great contribution to the theory of consumer behavior and the theory of firms, and also other economists ⁶ .

The economic behavior of both the subject and the social group does not lead to the maximization of the economic result of the behavior. H. Leibenstein found that, first of all, this is due to the inertia of economic activity. Subjects do not respond to changes in economic life until the need for a new decision becomes too obvious. Accordingly, for a certain period of time, the maximization of benefits does not occur.

The analysis of models of economic behavior carried out by H. Ley-Benstein made it possible to make other significant amendments to the traditional understanding of rational behavior. Considering firms as subjects of economic activity, in his theory of "X-efficiency" he came to the conclusion that firms in the process of doing business do not maximize profits and minimize costs (one of the reasons for this is the difference in the motivations of employees of the firm and the goals of the firm itself).

This position largely coincides with a number of aspects of the theory of the firm of G. Simon, who asserts that the adoption of a rational decision by a firm does not mean the choice of a maximizing function. In the decision-making process, a search is made for acceptable options, and in the condition of insufficient or limited information, the choice is made not in favor of the maximum option (it may fall out of sight), but in favor of one of the satisfactory options. The model “search - satisfaction,” proposed by the author, is now recognized as an economic science and is gradually being included in various theoretical and practical constructions. The well-known American economist J. Stiglitz showed that managers of large corporations are not interested in maximizing the profits of their firms, since this is associated with an increased risk ⁷ . Therefore, in order to maintain their position, managers choose development options focused on short-term and stable incomes. Another argument of the practical impossibility of making the decision most profitable for an organization is the following Stiglitz thesis: for shareholders, i.e. owners of corporations, the cost of finding errors managers will exceed the increase in income that can be obtained as a result of changes in company policies.

Instead of the maximization model, the optimization model is often used, but economists place more emphasis on the role of logical thinking and shift the center of gravity to factors external to the subject.

But an economic decision can be made on the basis of emotion or habit. Then, instead of the most profitable solution, the least psychologically expensive is carried out. Habit involves stereotypical automated actions, which saves time and energy costs. Emotion, in contrast to mental acts, gives a quick, though crude assessment of the situation, that is, again there is a saving in time and an economy of energy. The intuitive approach to calculating probabilities can also be chosen as less costly, since mental operations require more time and psycho-energy costs than perception and emotion.

However, the greater the subjective significance of the act, the higher its rationality, i.e. the more important for a person the result of his action, the sooner he will consider the decision, calculate, weigh, show all kinds of search activity.

Thus, an important factor that overlaps the desire for profit is the cost of the most profitable solution. You often prefer to buy something a little more expensive, but closer to home or do work with an assistant, rather than alone, and get less for it at his share of the reward. Then not rationality, but optimality becomes the criterion of an economic decision and deed. Optimality is understood as rationality limited by one factor or another, in this case, by cost.

Oddly enough, the additional psychological costs of making an economic decision can reduce its effectiveness. So, an interesting example from the field of management. American experts were convinced of the existence of the "burden of the winner" ⁸ . As a rule, it works, i.e. in the case when there are a lot of candidates for the position, it is likely that not the best will be selected. From a certain moment, any additional increase in costs only leads to a worsening of the situation.

2.1.7. Выбор и атрибуция

Кроме общепсихологических компонентов принятия экономического решения (восприятие и оценка, сравнение и понимание), на него оказывают влияние еще и социально-психологические (т.е. связанные с взаимодействием между людьми и группами) механизмы. Например, в процессе объяснения поведения других людей – партнеров, конкурентов включаются различные механизмы атрибутирована. Атрибуция – это приписывание человеком причин и мотивов поведения, личностных качеств и характеристик другим людям на основе обыденного анализа их действий и поступков, своего опыта и представлений. Такое приписывание часто бывает неточным и ошибочным.

The most typical mistake of attribution is the attribution of characteristics to the subject, which he does not possess, but the situation in which he finds himself. Suppose your potential partner temporarily refuses to cooperate, and you attribute to him self-interest, selfish interest. In fact, his behavior is dictated solely by the situation (for example, a temporary lack of financial resources), and he is really inclined to cooperate in a later period. If you find yourself in captivity of attribution and behaved harshly and self-seekingly in response, then you risk losing the possibility of further cooperation. Or, for example, you were refused to give up the price of the goods, and you linked the refusal with the greed of the seller, while the refusal is explained by obligations to the organization, and an insult to a particular person is inappropriate.

So, economic behavior is due to many reasons. The principle of profit maximization in recent decades has been refuted both in the studies of institutional economists and in the studies of psychologists. If previously irrational behavior was considered by the economy as an artifact, an exception, an anomaly, now psychologists and economists know that a rational decision is only one of the options for making a decision.

Control task

1. You were given 1000 dollars. Now make a choice between a 50% chance to win another 1000 dollars or a certain 100% opportunity to receive 500 dollars.

2. You were given $ 2,000. Now make a choice between a 50% chance of losing $ 1,000 and a 100% loss of $ 500.

Are the two proposed problems mathematically identical? Make a calculation.

What answer will most people prefer in the first case? Which preference is more typical for the second case? Explain the differences between the elections and their mechanism