Behavioral Economics: . . . Utility in the . . . Need to Go Beyond . . . Dependence on . . . Economics of Reciprocity What Is Reciprocity and Temptation This Explains Reciprocity What Is Temptation People’s Preferences . . . Laxman Bokati 1 , Olga Kosheleva 1 , How This Idea Helps Vladik Kreinovich 1 , and Nguyen Ngoc Thach 2 Home Page 1 University of Texas at El Paso Title Page 500 W. University, El Paso TX 79968, USA lbokati@miners.utep.edu, olgak@utep.edu, vladik@utep.edu ◭◭ ◮◮ 2 Institute for Research Science and Banking Technology ◭ ◮ Banking University HCMC, 39 Ham Nghi, District 1 Ho Chi Minh City, Vietnam Page 1 of 25 thachnn@buh.edu.vn Go Back Full Screen Close Quit
Behavioral Economics: . . . Utility in the . . . 1. Behavioral Economics: A Brief Reminder Need to Go Beyond . . . • Traditional economic models assumed that: Dependence on . . . What Is Reciprocity – people thoroughly analyze all their options and This Explains Reciprocity – make optimal decisions based on this analysis. What Is Temptation • In many decision-making situations: People’s Preferences . . . – this assumption works reasonably well and How This Idea Helps Home Page – leads to a reasonably accurate description of an overall economic process. Title Page • However, many research results – some of Nobel Prize ◭◭ ◮◮ quality – have shown that: ◭ ◮ – in many practical situations, Page 2 of 25 – the actual people’s behavior differs from the as- Go Back sumed ideal one. Full Screen • The analysis of such behavior and its economic conse- quences is known as behavioral economics . Close Quit
Behavioral Economics: . . . Utility in the . . . 2. Challenges for Behavioral Economics Need to Go Beyond . . . • Behavioral economics provides convincing and impres- Dependence on . . . sive examples of people’s non-optimal behavior. What Is Reciprocity This Explains Reciprocity • However, in many cases, it does not provide us with What Is Temptation quantitative models predicting people’s behavior. People’s Preferences . . . • Coming up with such models is an important challenge How This Idea Helps for behavioral economics. Home Page • One way to come with such predictions is: Title Page – to understand why people’s behavior differs from ◭◭ ◮◮ the predictions of traditional economic models, ◭ ◮ – so that, hopefully, this understanding will lead us Page 3 of 25 to the desired predictions. Go Back Full Screen Close Quit
Behavioral Economics: . . . Utility in the . . . 3. Why People’s Behavior Differs from the Tradi- Need to Go Beyond . . . tional Economic Predictions Dependence on . . . • There are two main reasons why people’s behavior dif- What Is Reciprocity fers from the traditional economic models. This Explains Reciprocity What Is Temptation • The first reason is that people often have limited ability People’s Preferences . . . (and limited time) to make a decision. How This Idea Helps • As a result, they sometimes make a sub-optimal deci- Home Page sion. Title Page • In such situations, it is, in general, not easy to come ◭◭ ◮◮ up with the adequate model of people’s behavior. ◭ ◮ • This requires a deep knowledge of how exactly we pro- Page 4 of 25 cess limited information in our brains. Go Back • However, there is another reason why people’s behavior differs from the traditional economic models. Full Screen Close Quit
Behavioral Economics: . . . Utility in the . . . 4. Why People’s Behavior Differs (cont-d) Need to Go Beyond . . . • Traditional models oversimplify how people gauge gains Dependence on . . . from possible actions. What Is Reciprocity This Explains Reciprocity • In such situations, in principle, we can come up with What Is Temptation quantitative models of human behavior. People’s Preferences . . . • For this, we need to provide more adequate, more ac- How This Idea Helps curate models of human utility. Home Page • Such situations are the “low-hanging fruits” of this re- Title Page search areas. ◭◭ ◮◮ • These are topics in which there is the biggest hope of ◭ ◮ reaching quantitative descriptions of human behavior. Page 5 of 25 Go Back Full Screen Close Quit
Behavioral Economics: . . . Utility in the . . . 5. What We Do in This Talk Need to Go Beyond . . . • We provide two examples of such phenomena. Dependence on . . . What Is Reciprocity • These examples correspond to (seemingly unrelated) This Explains Reciprocity phenomena of reciprocity and temptation. What Is Temptation • From the economic viewpoint, these are two different People’s Preferences . . . behaviors. How This Idea Helps Home Page • However, it turns out that they can be explained by using similar ideas and similar techniques. Title Page ◭◭ ◮◮ ◭ ◮ Page 6 of 25 Go Back Full Screen Close Quit
Behavioral Economics: . . . Utility in the . . . 6. Utility in the Traditional Economic Models Need to Go Beyond . . . • In the traditional economic models, it is usually as- Dependence on . . . sumed that a decision maker maximizes his/her gain. What Is Reciprocity This Explains Reciprocity • This gain is numerically expressed as utility u . What Is Temptation • This utility value describe the effect of this decision on People’s Preferences . . . this person at this particular moment of time. How This Idea Helps Home Page Title Page ◭◭ ◮◮ ◭ ◮ Page 7 of 25 Go Back Full Screen Close Quit
Behavioral Economics: . . . Utility in the . . . 7. Need to Go Beyond Traditional Models Need to Go Beyond . . . • In these models, person’s decisions are not affected: Dependence on . . . What Is Reciprocity – by gains (utilities) of others and/or This Explains Reciprocity – by gains of the same person at future moments of What Is Temptation time. People’s Preferences . . . • However, gains of others (and/or future gains of the How This Idea Helps same person) do affect our behavior. Home Page • Hardly anyone would prefer, e.g., $101 to $100 if this Title Page increase is accompanied by someone’s severe suffering. ◭◭ ◮◮ • Some people spend all their money like there is no to- ◭ ◮ morrow and retire in poverty. Page 8 of 25 • However, most people do limit somewhat their current Go Back expenses to save for retirement. Full Screen • It is all a matter of degree. Close Quit
Behavioral Economics: . . . Utility in the . . . 8. Dependence on Others’ Utilities Need to Go Beyond . . . • Let u (0) be approximate utilities that come only from Dependence on . . . i this person’s consumption. What Is Reciprocity This Explains Reciprocity • How can we take into account other people’s feelings? What Is Temptation • A natural way is to add, to u (0) i , terms proportional to People’s Preferences . . . other people’s utilities: How This Idea Helps u i = u (0) � + α ij · u j . Home Page i j � = i Title Page • Here each coefficient α ij describes how the utility of the ◭◭ ◮◮ i -th person depends on the utility of the j -th person. ◭ ◮ • This phenomenon is known by a polite term empathy : Page 9 of 25 – for positive α ij , this describes how people feel bet- Go Back ter if others around them are happier; Full Screen – it is also possible to have α ij < 0, when someone’s happiness makes the other person unhappy. Close Quit
Behavioral Economics: . . . Utility in the . . . 9. How to Describe Dependence on Utility in Dif- Need to Go Beyond . . . ferent Moments of Time Dependence on . . . • In the traditional models, we assume that: What Is Reciprocity This Explains Reciprocity – a person’s utility at moment t What Is Temptation – is determined only by his/her consumption at t . People’s Preferences . . . • In reality, the person also takes into account future How This Idea Helps utilities u t +1 , u t +2 , . . . , and past utilities u t − 1 , u t − 2 : Home Page � � u = u t + q j · u t + j + q j · u t + j . Title Page j> 0 j< 0 ◭◭ ◮◮ • This is known as discounting , since a person usually ◭ ◮ considers future experiences as less valuable. Page 10 of 25 • E.g., people will pay less that a dollar for a chance to Go Back get a dollar a year from now. Full Screen • We will show that this explains reciprocity and temp- tation. Close Quit
Behavioral Economics: . . . Utility in the . . . 10. What Is Reciprocity Need to Go Beyond . . . • Usually, people have reasonably fixed attitude to oth- Dependence on . . . ers. What Is Reciprocity This Explains Reciprocity • They feel empathy towards members of their family, What Is Temptation members of their tribe, usually citizens of their country. People’s Preferences . . . • They may also be consistently negative towards their How This Idea Helps country’s competitors. Home Page • However, they also have widely fluctuating attitudes Title Page towards people with whom they work. ◭◭ ◮◮ • It is difficult to predict how these attitudes will evolve ◭ ◮ – even in what direction they will evolve. Page 11 of 25 • Usually, people are nice to those who treat them nicely Go Back and negative to those who treat them badly. Full Screen Close Quit
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