DecisionMaking

Thepsychologyofchoice

AssumptionsofNeoclassical
Economics(HomoEconomicus)
Selfishnessanindividualchoosesonthe
basisofhis/herowninterests(notrue,
systematicaltruism)
Stable,exogenouspreferenceswhatthe
individualwantsiswelldefined,availableto
introspection,andstableovertime
Formalrationalityanindividuals
preferences,tastes,etc.areconsistentwith
eachother

RationalChoiceTheoriesfor
Individuals
Utilitytheoryoneagent,choicedependsonly
onstatesofnature

Example:Adecisionthatdependson
statesofnature
Options:
Planpicnicoutdoors
Planpicnicindoors

Possiblestatesofnature
Rain
Norain

Choicedependsonlikelihoodofrain,relative
qualityofpicnicindoors/outdoorswithand
withoutrain

RationalChoiceTheoriesfor
Individuals(VonNeumannand
Morgenstern,1944)
Utilitytheoryoneagent,choicedependsonly
onstatesofnature
Gametheorymorethanoneagent,choice
dependsonwhatotheragentsmaychoose

Example:adecisionthatdependson
whatothersmaydo
Options:
Gotothebeach
Gotothecinema

Yourfriendmaychooseto:
Gotothebeach
Gotothecinema

Youcannotcontrolorknowwhatyourfriendwilldo
Bothofyouknoweachotherspreferences
Choicedependsonwhatyouthinkyourfriendwilldo,which
dependsonwhats/hethinksyouwilldo,andsoon

ExpectedUtilityTheory
CrucialFeatures
Utility(degreeofliking)isdefinedby
(revealed)preferences
i.e.U(A)>U(B)iffAispreferredto(chosenover)B

ExpectedUtilityTheory
CrucialFeatures
Utility(degreeofliking)isdefinedby
(revealed)preferences
i.e.U(A)>U(B)iffAispreferredto(chosenover)B

Preferencesarewellordered
i.e.transitive:IfA?BandB?C,thenA?C

ExpectedUtilityTheory
CrucialFeatures
Utility(degreeofliking)isdefinedby(revealed)
preferences
i.e.U(A)>U(B)iffAispreferredto(chosenover)B

Preferencesarewellordered
i.e.transitive:IfA?BandB?C,thenA?C

Choicesunderuncertaintyaredeterminedby
expectedutility
Expectedutilityisaprobabilityweightedcombinationofthe
utilitiesofallnpossibleoutcomesO i

AConcaveUtilityCurve

Example:
ApplicationofUtilityTheory
Options:
Gamble(50%chancetowin$100;else$0)
SureThing(100%chancetowin$50)

Expectedvaluesarethesame:
EV(Gamble)=(.5)($100)+(.5)($0)=$50
EV(SureThing)=(1)($50)=$50

Buttheirexpectedutilitiesmaystilldiffer
EU(Gamble)=.5U($100)+.5U($0)
EU(SureThing)=U($50)

Expectedutilitytheorysaysthat
utilitiesare
Notdirectlyobservable(internaltoan
individual)
Notcomparableacrossindividuals
Constrainedbyrevealedpreferences(i.e.
choicesbetweengambles)
Note:Andersongetstherelationshipbetween
utilityandvaluewrong

Dopeopleschoicesobeythetheoryof
expectedutility(i.e.,formalrationality)?

ExpectedUtilityTheory
CrucialFeatures
Utility(degreeofliking)isdefinedby
(revealed)preferences
i.e.U(A)>U(B)iffAispreferredto(chosenover)B

UtilityversusPreference(Lichtenstein
andSlovic,1971;1973)
Psgiventwooptions:
Pbet:29/36probabilitytowin$2
$bet:7/36probabilitytowin$9

Twoconditions:
Chooseone:MostpreferPbet
Valuethebets:Mostvalue$bethigher

Showsutility(basedoncashvalue)isnot
consistentwithrevealedpreference

ExpectedUtilityTheory
CrucialFeatures
Utility(degreeofliking)isdefinedby
(revealed)preferences
i.e.U(A)>U(B)iffAispreferredto(chosenover)B
Contradictedbypreferencereversal

ExpectedUtilityTheory
CrucialFeatures
Utility(degreeofliking)isdefinedby
(revealed)preferences
i.e.U(A)>U(B)iffAispreferredto(chosenover)B
Contradictedbypreferencereversal

Preferencesarewellordered
i.e.transitive:IfA?BandB?C,thenA?C

TestsofTransitivity(A.Tversky,1969)
Psshownratingsofcollegeapplicantsonthree
dimensions:
Applicant

Intelligence

Stability

Social

A
B
C
D
E

69
72
75
78
81

84
78
72
66
60

75
65
55
45
35

PschoseAoverB,BoverC,CoverD,DoverE,but E
overA(differenceinintelligenceoutweighed)

ExpectedUtilityTheory
CrucialFeatures
Utility(degreeofliking)isdefinedby
(revealed)preferences
i.e.U(A)>U(B)iffAispreferredto(chosenover)B
Contradictedbypreferencereversal

Preferencesarewellordered
i.e.transitive:IfA?BandB?C,thenA?C
Contradictedbythreeoptionintransitivities(and
preferencereversals)

ExpectedUtilityTheory
CrucialFeatures
Utility(degreeofliking)isdefinedby(revealed)preferences
i.e.U(A)>U(B)iffAispreferredto(chosenover)B
Contradictedbypreferencereversals

Preferencesarewellordered
i.e.transitive:IfA?BandB?C,thenA?C
Contradictedbythreeoptionintransitivities(andpreferencereversals)

Choicesunderuncertaintyaredeterminedbyexpectedutility
Expectedutilityisaprobabilityweightedcombinationoftheutilitiesof
allnpossibleoutcomesO i

TestingExpectedUtility(Tverskyand
Kahneman,1981)
Choosebetween
A.Surewinof$30
B.80%chancetowin$45

TestingExpectedUtility(Tverskyand
Kahneman,1981)
Choosebetween:
A.Surewinof$30
B.80%chancetowin$45

Choosebetween:
C.25%chancetowin$30
D.20%chancetowin$45

TestingExpectedUtility(Tverskyand
Kahneman,1981)
Choosebetween:
A.Surewinof$30[78percent]
B.80%chancetowin$45[22percent]

Choosebetween:
C.25%chancetowin$30[42percent]
D.20%chancetowin$45[58percent]

TestingExpectedUtility(Tverskyand
Kahneman,1981)
Choosebetween:

A.Surewinof$30[78percent]
B.80%chancetowin$45[22percent]

Choosebetween:

C.25%chancetowin$30[42percent]
D.20%chancetowin$45[58percent]

ButthispatternisinconsistentwithEUT:

EU(A)>EU(B)=>u($30)>.8u($45)
EU(D)>EU(C)=>.25u($30)<.2u($45)
Multiplybothsidesofbottominequalityby4:contradictstop
inequality

TestingExpectedUtility(Tverskyand
Kahneman,1981)
Choosebetween:

A.Surewinof$30[78percent]
B.80%chancetowin$45[22percent]

Choosebetween:

C.25%chancetowin$30[42percent]
D.20%chancetowin$45[58percent]

ButthispatternisinconsistentwithEUT:

EU(A)>EU(B)=>u($30)>.8u($45)
EU(D)>EU(C)=>.25u($30)<.2u($45)
Multiplybothsidesofbottominequalityby4:contradictstopinequality

Thisiscalledacertaintyeffect:certaingainshaveextra
psychologicalvalue

ExpectedUtilityTheory
CrucialFeatures
Utility(degreeofliking)isdefinedby(revealed)preferences
i.e.U(A)>U(B)iffAispreferredto(chosenover)B
Contradictedbypreferencereversals

Preferencesarewellordered

i.e.transitive:IfA?BandB?C,thenA?C
Contradictedbythreeoptionintransitivities(andpreferencereversals)

Choicesunderuncertaintyaredeterminedbyexpectedutility

Expectedutilityisaprobabilityweightedcombinationoftheutilitiesof
allnpossibleoutcomesO i

Contradictedbycertaintyeffect

So,peopleschoicesdonotobey
formalrationality.
Aretheirpreferencesnonetheless
stable?

NeoclassicalAssumptionsAbout
Preferences
Thechosenoptioninadecisionproblem
shouldremainthesameevenifthesurface
descriptionoftheproblemchanges
(descriptiveinvariance)

ATestofDescriptiveInvariance
(TverskyandKahneman,1981)
Consideratwostagegame.Inthefirststage,there
isa75%chancetoendthegamewithoutwinning
anything,anda25%chancetomoveintothesecond
stage.Ifyoureachthesecondstage,youhavea
choicebetween
Surewinof$30
80%chancetowin$45

Yourchoicemustbemadebeforethegamestarts,
i.e.beforetheoutcomeofthefirststageisknown

ATestofDescriptiveInvariance
(TverskyandKahneman,1981)
Consideratwostagegame.Inthefirststage,there
isa75%chancetoendthegamewithoutwinning
anything,anda25%chancetomoveintothesecond
stage.Ifyoureachthesecondstage,youhavea
choicebetween
Surewinof$30[74percent]
80%chancetowin$45[26percent]

Yourchoicemustbemadebeforethegamestarts,
i.e.beforetheoutcomeofthefirststageisknown

ATestofDescriptiveInvariance
(continued)
Butthisgambleisformallyidenticaltoa
problemwesawearlier,namely:
Choosebetween:
C.25%chancetowin$30[42percent]
D.20%chancetowin$45[58percent]

ATestofDescriptiveInvariance
(continued)
Butthisgambleisformallyidenticaltoaproblemwe
sawearlier,namely:
Choosebetween:

C.25%chancetowin$30[42percent]
D.20%chancetowin$45[58percent]

Compare:

Consideratwostagegame.Inthefirststage,thereisa
75%chancetoendthegamewithoutwinninganything,and
a25%chancetomoveintothesecondstage.Ifyoureach
thesecondstage,youhaveachoicebetween
Surewinof$30[74percent]
80%chancetowin$45[26percent]

ATestofDescriptiveInvariance
(continued)

Butthisgambleisformallyidenticaltoaproblemwesawearlier,namely:
Choosebetween:

C.25% chancetowin$30[42percent]
D.20% chancetowin$45[58percent]

Compare:

Consideratwostagegame.Inthefirststage,thereisa75%chancetoendthe
gamewithoutwinninganything,anda25%chancetomoveintothesecond
stage.Ifyoureachthesecondstage,youhaveachoicebetween
Surewinof$30[74percent]
80% chancetowin$45[26percent]

Aviolationofdescriptiveinvariance
Thisisknownasapseudocertaintyeffect:Whenastageoftheproblem
ispresentedasinvolvingacertaingain,itcarriesextraweightevenif
gettingtothatstageisitselfuncertain.

FramingEffects(Tverskyand
Kahneman,1981)

Problem1:ImaginethattheU.S.ispreparingfortheoutbreakofan
unusualAsiandisease,whichisexpectedtokill600people.Two
alternativeprogramstocombatthediseasehavebeenproposed.Assume
thattheexactscientificestimateoftheconsequencesoftheprogramsare
asfollows:
IfProgramAisadopted,200peoplewillbesaved[72percent]
IfProgramBisadopted,thereis1/3probabilitythat600peoplewillbe
saved,and2/3probabilitythatnopeoplewillbesaved.[28percent]
Problem2:
IfProgramCisadopted400peoplewilldie[22percent]
IfProgramDisadoptedthereis1/3probabilitythatnobodywilldie,
and2/3probabilitythat600peoplewilldie.[78percent]
Buttheprogramsareidentical!Thisexamplealsoviolatesdescriptive
invariance.
Showsreflectioneffect:Riskaversioninthedomainofgains;riskseeking
inthedomainoflosses

NeoclassicalAssumptionsAbout
Preferences
Thechosenoptioninadecisionproblem
shouldremainthesameevenifthesurface
descriptionoftheproblemchanges
(descriptiveinvariance)
Contradictedbypseudocertaintyandframing
effects

NeoclassicalAssumptionsAbout
Preferences
Thechosenoptioninadecisionproblemshould
remainthesameevenifthesurfacedescriptionofthe
problemchanges(descriptiveinvariance)
Contradictedbypseudocertaintyandframingeffects

Thechosenoptionshoulddependonlyonthe
outcomesthatwillobtainafterthedecisionismade,
notondifferencesbetweenthoseoutcomesand
thestatusquo
whatoneexpects
theoverallmagnitudeofthedecision

StatusQuoBias(Kahnemen,Knetsch,
andThaler,1990)
Sellerseachgivencoffeemug,askedhow
muchtheywouldselliffor
Buyersnotgivenmug,askedhowmuchthey
wouldpayforone
Medianvalues:
Sellers:$7.12
Buyers:$2.87

StatusQuoBias(Kahnemen,Knetsch,
andThaler,1990)
Sellerseachgivencoffeemug,askedhowmuchtheywould
selliffor
Buyersnotgivenmug,askedhowmuchtheywouldpayfor
one
Medianvalues:
Sellers:$7.12
Buyers:$2.87

Choosersaskedtochoosebetweenmugandcashpreferred
mugifcashamountwas$3.12orlower,onaverage
Showsendowmenteffectwevaluewhatwehave;andloss
aversionwedontwanttoloseit

Mentalaccountsandexpectations
(TverskyandKahneman,1981)
Imaginethatyouhavedecidedtoseeaplay
whereadmissionis$20perticket.Asyou
enterthetheateryoudiscoverthatyouhave
losttheticket.Theseatwasnotmarkedand
theticketcannotberecovered.Wouldyoupay
$20foranotherticket?

Mentalaccountsandexpectations
(TverskyandKahneman,1981)
Imaginethatyouhavedecidedtoseeaplay
whereadmissionis$20perticket.Asyou
enterthetheateryoudiscoverthatyouhave
losttheticket.Theseatwasnotmarkedand
theticketcannotberecovered.Wouldyoupay
$20foranotherticket?

Mentalaccountsandexpectations
(TverskyandKahneman,1981)
Imaginethatyouhavedecidedtoseeaplay
whereadmissionis$20perticket.Asyou
enterthetheateryoudiscoverthatyouhave
losta$20bill.Wouldyoustillpay$20fora
tickettotheplay?

Mentalaccountsandexpectations
(TverskyandKahneman,1981)
Imaginethatyouhavedecidedtoseeaplaywhereadmission
is$20perticket.Asyouenterthetheateryoudiscoverthatyou
havelosttheticket.Theseatwasnotmarkedandtheticket
cannotberecovered.Wouldyoupay$20foranotherticket?
[No:54%]
Imaginethatyouhavedecidedtoseeaplaywhereadmission
is$20perticket.Asyouenterthetheateryoudiscoverthatyou
havelosta$20bill.Wouldyoustillpay$20foratickettothe
play?[Yes:88%]
Butinbothproblems,thefinaloutcomeisthesameifyoubuy
theticket:youhavethesameamountofmoneyandyousee
theplay.Whyshouldthesecasesdiffer?

DependenceonRatios(Tverskyand
Kahneman,1981)
Imaginethatyouareabouttopurchaseajacketfor
$250,andacalculatorfor$30.Thecalculator
salesmaninformsyouthatthecalculator[jacket]you
wishtobuyisonsalefor$20[$240]attheother
branchofthestore,located20minutesdriveaway.
Wouldyoumakethetriptotheotherstore?
Results:
68%willingtomakeextratripfor$30calculator
29%willingtomakeextratripfor$250jacket

Note:savesameamountinbothcases:$10.Why
thediscrepency?

NeoclassicalAssumptionsAbout
Preferences
Thechosenoptioninadecisionproblemshould
remainthesameevenifthesurfacedescriptionofthe
problemchanges(descriptiveinvariance)
Contradictedbypseudocertaintyandframingeffects

Thechosenoptionshoulddependonlyonthe
outcomesthatwillobtainafterthedecisionismade,
notondifferencesbetweenthoseoutcomesand

thestatusquo:Contradictedbyendowmenteffect
whatoneexpects:Contradictedbymentalaccounts
theoverallmagnitudeofthedecision:Contradictedbyratio
effect

MoreNeoclassicalAssumptionsAbout
Preferences
Preferencesoverfutureoptionsshouldnot
dependonthetransientemotionalstateofthe
decisionmakeratthetimeofthechoice(state
independence)

EndowmentEffectRevisited(Van
Boven,Dunning,andLoewenstein,
2000)
Replicatedcoffeemugendowmenteffect
Avg.sellingprice:$6.37
Avg.buyingprice:$1.85

Sellers[Buyers]askedtoestimatehowmuchbuyers[sellers]
wouldpay,andrewardedforaccuratepredictions
Sellersestimateofbuyingprice:$3.93
Buyersestimateofsellingprice:$4.39

Resultshowsprojectionbias:estimatesarebiasedtowardPs
emotionalstateatthetimeofestimate(attachedorunattached
tomug)
Validatedforpredictingonesownsellingpricebeforeowninga
mug(Loewenstein&Adler,1995)

Whyyoushouldntshoponanempty
stomach(Read&VanLeeuwen,1998)
Officeworkerschoosebetweenhealthyandunhealthy
snackstobereceivedinaweek
Decisiontimesandprojectedsnackreceptiontimes
eitherwhen
hungry(lateinafternoon)
satiated(rightafterlunch)
Future
Hunger

Results:%choosing
unhealthysnack:
Current
Hunger

Hungry

Satiated

Hungry

78%

42%

Satiated

56%

26%

MoreNeoclassicalAssumptionsAbout
Preferences
Preferencesoverfutureoptionsshouldnot
dependonthetransientemotionalstateofthe
decisionmakeratthetimeofthechoice(state
independence)
Contradictedbyprojectionbias

MoreNeoclassicalAssumptionsAbout
Preferences
Preferencesoverfutureoptionsshouldnot
dependonthetransientemotionalstateofthe
decisionmakeratthetimeofthechoice(state
independence)
Contradictedbyprojectionbias

Preferencesbetweenfutureoutcomesshould
notvarysystematicallyasafunctionofthe
timeuntiltheoutcomes(delayindependence)

TestingDelayIndependence(Ainslie
andHaendel,1983)
Pschosebetweentwoprizestobepaidby
reputablecompany:
1.$50todayversus$100in6months
2.$50in12monthsversus$100in18months

TestingDelayIndependence(Ainslie
andHaendel,1983)
Pschosebetweentwoprizestobepaidby
reputablecompany:
1.$50todayversus$100in6months
2.$50in12monthsversus$100in18months

Mostchose$50todayinproblem1,but$100
in18monthsinproblem2
Violatesdelayindependenceillustrates
hyperbolicdiscounting

TemporalDiscounting

NormativeTheory:exponentialdiscounting
(constantdiscountrate)

TemporalDiscounting

NormativeTheory:exponentialdiscounting
(constantdiscountrate)

DescriptiveTheory:hyperbolic
discounting(temporal
myopia/impulsiveness)

MoreNeoclassicalAssumptionsAbout
Preferences
Preferencesoverfutureoptionsshouldnotdependon
thetransientemotionalstateofthedecisionmakerat
thetimeofthechoice(stateindependence)
Contradictedbyprojectionbias

Preferencesbetweenfutureoutcomesshouldnotvary
systematicallyasafunctionofthetimeuntilthe
outcomes(delayindependence)
Contradictedbyhyperbolicdiscounting/impulsiveness

MoreNeoclassicalAssumptionsAbout
Preferences
Preferencesoverfutureoptionsshouldnotdependonthe
transientemotionalstateofthedecisionmakeratthetimeof
thechoice(stateindependence)
Contradictedbyprojectionbias

Preferencesbetweenfutureoutcomesshouldnotvary
systematicallyasafunctionofthetimeuntiltheoutcomes
(delayindependence)
Contradictedbyhyperbolicdiscounting/impulsiveness

Experiencedutilityshouldnotdiffersystematicallyfrom
decisionutility
predictedutility
retrospectiveutility

TheHarvard/YaleAssistantProfessors
Problem(Anecdotal)
HarvardandYalegranttenuretoveryfewjuniorfaculty
Butprestigeconsiderationsoftencauseacceptanceofjob
offersoverschoolsmorelikelytogranttenure(e.g.Michigan)
Resultcanbeamiserableexperience:dropinstatus,feelingof
failurewhenassistantprofessorshipisover
Possiblyaninstanceofdecisionutility(revealedbychoice)
beinginconsistentwithexperienced(andevenpredicted)utility
AnticipatedbyAdamSmith:peopleexaggerateimportanceof
socialstatus

FailuresofHedonicPrediction
Peopleneglecteffectsofadaptationtosurroundings
inpredictingfutureutility

Misprediction,afterinitial(unpleasant)exposure,of(non)
enjoymentofplainyogurtafter8dailyepisodesof
consumption(Kahneman&Snell,1992)
Changeinsocialcomparisongroup(e.g.teachingat
Harvard/Yale,movingtoanewneighborhood)
Wearinesswithtravelplanningoverlylongvacations,too
muchtimeatthebeach

Assistantprofessorsoverestimateeffectsoftenure
decisiononhappinessoneyearlater(Gilbertand
Wilson,2000)

ATestofHedonicMemory(Kahneman
etal.,1993)
Psgiventwounpleasantexperiences:
Shorttrial:Holdhandin14Cwaterfor60s
Longtrial:Holdhandinwaterfor90s;14Cfor60s,followed
bygradualriseto15Covernext30s

Aftersecondtrial,Pscalledintorepeatoneofthe
twotrialsexactly
65%chosetorepeatthelongtrial

Interpretation:durationneglectpeopleremember
andoverweighttheendoftheexperience(agradual
declineinpain)

ApplicationinClinicalSetting
(RedelmeierandKahneman,1996)
Patientsundergoingcolonoscopyreportedintensityof
painevery60s
Laterprovidedseveralmeasuresofremembered
utilityforthewholeexperience
Rememberedutilityratingsreflectednottotalutility
(additionofpainratings)butapeakandendrule:
highestandlastpainratingsdominatedmemory
Failuretointegratemomentutilities:mayaccountfor
differenceinreportedhappinessbetweenFrenchand
U.S.surveytakers

MoreNeoclassicalAssumptionsAbout
Preferences
Preferencesoverfutureoptionsshouldnotdependonthe
transientemotionalstateofthedecisionmakeratthetimeof
thechoice(stateindependence)
Contradictedbyprojectionbias

Preferencesbetweenfutureoutcomesshouldnotvary
systematicallyasafunctionofthetimeuntiltheoutcomes
(delayindependence)
Contradictedbyimpulsiveness

Experiencedutilityshouldnotdiffersystematicallyfrom
decisionutility:Harvard/Yalejuniorfacultyproblem
predictedutility:Contradictedbyfailuretopredictadaptation
retrospectiveutility:Contradictedbydurationneglectandfailureto
integratemomentutilities

ProspectTheory(Kahnemanand
Tversky,1979;1992)
Prospectsareevaluatedaccordingtoavalue
functionthatexhibits
referencedependence(subjectivelyoriented
aroundazeropoint,defininggainsandlosses)
diminishingsensitivitytodifferencesasonemoves
awayfromthereferencepoint
lossaversion:steeperforlossesthanforgains

TheValueFunction

ProspectTheory(Kahnemanand
Tversky,1979;1992)
Prospectsareevaluatedaccordingtoavaluefunctionthat
exhibits

referencedependence(subjectivelyorientedaroundazeropoint,
defininggainsandlosses)
diminishingsensitivitytodifferencesasonemovesawayfromthe
referencepoint
lossaversion:steeperforlossesthanforgains

Probabilitiesaretransformedbyaweightingfunctionthat
exhibitsdiminishedsensitivitytoprobabilitydifferencesasone
movesfromeithercertainty(1.0)orimpossibility(0.0)toward
themiddleoftheprobabilityscale(0.5)

Refinementofreflectioneffect:riskaversionformediumtohigh
probabilitygainsandlowprobabilitylosses;riskseekingformediumto
highprobabilitylossesandlowprobabilitygains

Someeveryday,observed
consequencesofprospecttheory
(Camerer,2000)

Lossaversion:

Reflectioneffect:

Equitypremiuminstockmarket:stockreturnstoohighrelativetobondreturns
Cabdriversquitarounddailyincometargetinsteadofmakinghaywhilesun
shines
Mostemployeesdonotswitchoutofdefaulthealth/benefitplans
Peopleatquarterbasedschoolspreferquarters,atsemesterbasedschools
prefersemesters
Horseracing:favoritesunderbet,longshotsoverbet(overweightlowprobability
loss);switchtolongshotsatendoftheday
Peopleholdlosingstockstoolong,sellwinnerstooearly
Customersbuyoverpricedphonewireinsurance(overweightlowprobability
loss)
Lotteryticketsalesgoupastopprizerises(overweightlowprobabilitywin)

Moreseriousconsequences
Lossaversionmakesindividuals/societiesunwillingto
switchtohealthierliving(fearlossofincome,
unsustainableluxuries)
Riskseekingforlikelylossescancauseprolonged
pursuitofdoomedpolicies,e.g.warsthatarenot
likelytobewon,choosingcourttrialinsteadof
bargaining
Riskseekingforunlikelygainscanleadtoexcessive
gamblinginindividuals,quixoticpolicieswhenleaders
gettoopowerful

Okay,peoplearerationalanddont
havestablepreferences,butarentthey
atleastbasicallyselfish?

SelfInterestAssumptionin
GameTheory
Choicesingamesshouldalwaysreflectwhat
isbestforthedecisionmaker,i.e.whatwill
maximizethedecisionmakerspayoff

PrisonersDilemma(Tucker,1955)

PrisonersDilemmaLabeling
Experiment(RossandSamuels,1993)
WhenPDislabeledtheWallStreetGame,
only1/3cooperate
WhenitislabeledtheCommunityGame,2/3
cooperate
Showspresenceofbothtendencies
defectionandcooperationwhichcanbe
evokedbysocialsignals

TheUltimatumGame(Guthetal.,
1982)
$100inonedollarbillsavailabletobedivided
betweentwoplayers
Proposerchoosesadivision
Receivercaneither
accept:bothreceiveproposedamounts
reject:bothreceivenothing

HowmuchshouldtheProposeroffer?

TheUltimatumGame(Guthetal.,
1982)
$10inonedollarbillsavailabletobedivided
betweentwoplayers
Proposerchoosesadivision
Receivercaneither
accept:bothreceiveproposedamounts
reject:bothreceivenothing

HowmuchshouldtheProposeroffer?

Ultimatumgameexperiment(Thaler,
1988)
Mostproposersoffer$5(evensplit),oralittle
less,tothereceiver
altruism

Lowoffers($1)usuallyrejected
altruisticpunishment

DictatorGame(Kahnemanetal.,1986)
OneP(studentinclass)askedtodivide$20
betweenselfandotherP.OtherPhasno
choicetoaccept/reject.
Twopossibilities:
Evensplit($10each)
Unevensplit($18forself,$2forother)

Gametheorypredictsunevensplit
76%choseanevensplit

UltimatumandDictatorGamesin
TraditionalSocieties(Henrichetal.,
2001)
Pstested15smallscalesocieties
Ultimatumgame:

Meanoffervariedfrom0.26to0.58(0.44inindustrial
societies)
Rejectionratealsoquitevaried:lowoffersrarelyrejectedin
somegroups,inothershighoffersareoftenrejected

Greatvariationinbehaviorevenamongnearby
groups;dependsondeepaspectsofculture,
experience:

e.g.meatsharingAche(Paraguay)andvillageminded
Orma(Kenya)madegenerousoffers,familyfocused
Machiguenga(Peru)showedlowcooperation

UltimatumandDictatorGamesin
TraditionalSocieties(Henrichetal.,
2001)
Pstested15smallscalesocieties
Ultimatumgame:
Meanoffervariedfrom0.26to0.58(0.44inindustrialsocieties)
Rejectionratealsoquitevaried:lowoffersrarelyrejectedinsome
groups,inothershighoffersareoftenrejected

Greatvariationinbehaviorevenamongnearbygroups;
dependsondeepaspectsofculture,experience:
e.g.meatsharingAche(Paraguay)andvillagemindedOrma(Kenya)
madegenerousoffers,familyfocusedMachiguenga(Peru)showedlow
cooperation

Generalconclusion:thereisnosuchthingashomo
economicus;cooperationbehaviorishighlyvariable,heavily
determinedbyculturalnorms

EffectsofaNormofSelfInterest
Peopledescribeinvolvementinsocialcauseasbeing
moreselfinterestmotivatedthanitis(Miller,1999)
VotingbehaviorinU.S.becomingmoreselfinterest
driven(McCarty,inpress),mayreflectshifttoward
greaternormofselfinterestinpolitics
Economictheoriesandlanguagecanbecomeself
fulfilling(Ferraro,Pfeffer,andSutton,2003)

Finally
Cognitivepsychologycaninformmanyareas
ofresearch,theory,andpracticethatdonot
nowproperlyincorporateitsinsights
Theoriesaboutpsychology,whethergrounded
indataornot,canhaveprofound
consequencesforthewaywelive