Session 1 Notes PDF

session 1 Behavioural Economics Traditional Economic Theories: Homo economics Concept in economics that represents an idealised human being with the following qualities: Rational decision making Makes decisions base...

session 1 Behavioural Economics Traditional Economic Theories: Homo economics Concept in economics that represents an idealised human being with the following qualities: Rational decision making Makes decisions based on logic and reason Driven by self-interest Primarily motivated by personal gain Maximise utility Every decision is aimed at maximising utility and satisfaction Central figure to classical + neoclassical economic theories Behavioural Economics Field of study that combines insights from psychology and economics to better understand how individuals actually make decisions It reveals the actual behaviour, as opposed to how they are assumed to behave under traditional economic models Key concepts Heuristics → the mental shortcuts or rules of thumb that individuals often use to make decisions more easily They often lead to systematic errors or biases Cognitive Biases → systematic patterns of deviation from rationality in judgement Homo economicus =/= Homo sapiens session 1 1  Applies insights from laboratory experiments, psychology + other social sciences in economics Rationality There are two systems: System 1 → operates automatically and quickly, with little or no effort Driven by instincts, emotions and learned experiences Includes, voluntary + involuntary actions that run on automatic pilot It relies on intuition or gut feeling, shaped by past experiences e.g. Detect that one object is more distant than another System 2 → slow, deliberate and analytical mode of thinking Involves conscious effort + logic + reasoning Activated when more complex, unfamiliar or important decisions need to be made Thinking is conscious e.g. Focus on the voice of a particular person in a crowded and noisy room System 2 has limited capacity - explains the limited set of attention + cognitive resources people have Interaction of Both Systems Both active when awake System 1 - effortless System 2 - standard in low-effort mode in which only a fraction of its capacity is used System 1 calls for System 2 When system 1 is in difficulties But system 2 needs to pay some attention to detect those difficulties Efficient → minimising effort + optimising performance Potential conflict → system 1 cannot be turned off session 1 2  Conflict 1: Müller-Lyer Illusion Optical illusion that plays with our perception of line length Both lines are of equal length, but appear to be of different lengths due to the addition of an arrow-like figure at the end System 1 Thinking → quick judgement based on visual perception Reliance on heuristics and shortcuts that interpret that the arrows are unequal System 2 Thinking → engaged to correct perception once aware of the actual length While System 2 can analyse and solve complex problems, sometimes it can’t override the automatic perceptual processes that are deeply ingrained in the brain’s pattern recognition system What if someone gets a 1 month salary to answer these questions correctly? Cognitive Reflection Test - Enke et al. 2023 Cognitive Reflection Test → measure designed to assess an individual’s ability to override an initial, intuitive response + engage in analytical thinking Consists of questions that often produce an immediate but incorrect answer Objective of the study → evaluate the relationship between cognitive reflection + decision-making in economic contexts Examine how individuals with higher CRT scores might make more rational + less biased decisions Explore how different incentive structures affected participants’ performance on the CRT Structures No incentives → participants are not offered any rewards or motivations to perform well on the test session 1 3  Standard Incentives → participants are offered a typical or moderate level of incentives to encourage better performance High Incentives → participants are provided with significantly larger rewards for achieving correct answers Results High incentives did not effectively mitigate biases Response time increased with high stakes but actual performance improvements were minimal How can we debias answers for free? Isler et al. (2010): Decision Justification and Debias Training Study that examines how providing justification for decisions influences biases and decision-making processes. Objective → investigate how debiasing training can help improve decision-making quality Methodology → a diverse group of individuals were subjected to various decision- making scenarios They were divided into groups receiving different types of training: Debias training → focused on strategies to counteract cognitive biases Control group → did not receive any specific debiasing instructions They made decisions + were asked to justify those decisions session 1 4  Conclusions → providing justification for decisions and undergoing debiasing training can significantly enhance the quality of decision-making Why? Reflecting on the reasons behind choices helped with critical thinking Debiasing training eased the recognition of cognitive biases Three Interacting Systems Stanovich et al. (2016) - Rationality and Effortful Thinking Explores the interplay between cognitive ability and the types of thinking processes involved in rational decision-making The study is grounded in dual-process theory The authors define rationality as → the ability to make decisions that align with objective standards of logic + evidence The equation proposed → Rationality = Effortful Thinking (S1 vs S2) x Cognitive Ability Willingness to engage in effortful thinking + capacity to do so are critical for rational decision-making Thinking and Self Control Marshmallow test → explores self-control, delayed gratification and its long-term effect on individuals session 1 5  Sperber et al. (2024) → states this test does not reliably predict adult functioning Very small correlations, that mostly disappear after controlling for other variables (e.g. family background, child cognitive abilities) session 1 6