Behavioural and Evolutionary Economics

Lakatos
1. Progressive: increasing explanatory power
  1. Modern Behavioural Econ
    1. study: effects ofpsychological, social, cognitive and emotional factors on decisions
    2. verificationist
    3. observation & experimentation
2. Degenerating: explanatory power only maintained by ad hoc modifcations to allow unexpected findings to fit
  1. Neoclassical
    1. deductivity theory and method
      1. verifcationist approach to hyp testing
    2. normative bias - doesn't explain actual econ; but utopia
Automotive Sector
1. different decision making processes: corporate vs family customer
2. little knowledge of market (don't buy cars often)
3. Kelly: Core Identity
  1. emotions exploited to prompt consumption
  2. dismissal of options that don't match identity
4. Enjoyment by Anticipation
  1. test drive + talk about how car fills core values
5. wealth is relative
6. Biases and Heuristics
  1. Anchoring ($)
  2. Loss Aversion
  3. Sunk Cost Fallacy (time)
7. Information overload ("Confusopoly")
  1. revert to default options
8. Social Pressure - Fishbein-Ajzen model of behavioural intentions
Economics of Happiness: Easterlin Paradox
1. Relative Wages
  1. Fairness
  2. Justice
  3. Local Reference Point - Anchoring Heuristic
2. Psychological Desires
  1. Status
    1. autonomy
    2. control & lower uncertainty
    3. Org. Rank
  2. Novelty (comfort vs pleasure) (Scitovsky)
    1. the brain shuts down if it receives no stimulation; but if we receive too much novelty too fast, it can overwhelm the brain
    2. Modern life makes it easy to meet our basic needs, resulting in a lack of stimulus
    3. habituate very quickly to changes in happiness.
  3. Challenge
    1. personal identity constructs limit ability to embrace opportunity
  4. Social Security
    1. Shackle
3. Aspirations (Simon, Cyert and March)
  1. how realistic ?
  2. how readily to aspiration adjust in line with attainments?
  3. significant of core constructs to the aspiration
  4. aspirations and ability to adjust - strong correlation to happiness and Income
4. Perspective & Frame of Mind
  1. ways of thinking determine perception of stimuli
  2. glass half full vs glass half empty
5. Biases & Heuristics
  1. social reference points
  2. Representativeness
  3. Anchoring
Relationship Decisions: Partners, Children, Termination
1. Choice of Partner
  1. Rarely Calculated Decisions
  2. Utility Maximising: gather all info, do not settle for 2nd best, looking for better mate while in relationship
    1. vs
      1. Satisficing (Simon): decide on preferences, select someone who meets criteria
        Aspiration levels set by external reference points (friends, family, TV)
        Watching romantic movies lowers relationship satisfaction
        Simple Search Rules
    2. unhappy, regretful
      1. needle/haystack analogy
  3. "Price" or value of a person
    1. Consumer Surplus (Settler / Reacher)
    2. Price will be equal
    3. Attractiveness is subjective
      1. Friedman: supermodel marries man who promises to wash all dishes
2. Children
  1. Cognitive Dissonance
  2. Heuristics & Biases
    1. Hyperbolic discounting
    2. overconfidence
    3. Illusory Correlation (representativeness)
    4. Anchoring
  3. Shackle - life-changing entrepreneurial gamble (high uncertainty)
    1. no probabilities, just obstacles
      1. no obstacle to happy marriage -> seen as perfectly possible -> unsuccessful marriage is a surprise
  4. External reference points (Simon)
  5. Evolutionary Approach: Routines used in raising children (from own childhood)
3. Termination
  1. Clash in core values
  2. Biases & Heuristics
    1. Confirmation Bias
    2. Sunk Cost Fallacy
    3. Hyperbolic Discounting
    4. Anchoring
    5. Endowment Effect
    6. Loss Aversion
    7. Status Quo
  3. Stuck because of core values (Loyalty)
Behavioural Theory of the Firm vs Kahneman & Tversky vs Nelson & Winters Evolutionary Analysis
1. BTF (Simon, Cyert March)
  1. pursuit of sub goals by all staff
    1. Managers aversion to change
  2. satisficing not optimising
  3. multiple goals not one global strategy
  4. attention to goals in sequential order
  5. avoidance of uncertainty
    1. 'if it works dont mess with it'
      1. routines
    2. allow small firms to experiment, buy them if it works
    3. negotiated environment via lobbying
      1. suppliers: Contracts
      2. Customers: Marketing
2. Evolutionary (Nelson & Winters)
  1. Firm as collection of staff knowledge
    1. managers coordinate pool of resources
      1. struggle implementing big changes
  2. Routine based behaviour gives competitive advantage
    1. survival of the fittest
    2. rolled out on larger scale: franchising, licensing, buying out
3. Kahneman & Tversky
  1. Heuristics & Biases influence decision making and subvert managers attempts to optimise profit
    1. Founded in expertise: positive outcomes
    2. Loss Aversion (links to uncertainty avoidance in BTF and routines of N&W)
  2. Multiple goals: cognitive limitations, millers rule

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