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Lecture notes Psychology and Economic Behavior ()
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Table of contentsLECTURE 1 INTRODUCTION TO PEB................................................................................................................ 3
Economic Psychology vs behavioral economics...................................................................................................4
Cumulative prospect theory.................................................................................................................................6
Summary..............................................................................................................................................................7
LECTURE 2 MONEY, MATERIALISM & POVERTY..............................................................................................8
Overview the lecure..............................................................................................................................................8
Priming Money.....................................................................................................................................................9
Psychology of Scarcity: what does it mean not to own enough?.......................................................................11
Summary questions............................................................................................................................................11
LECTURE 3 ECONOMIC BEHAVIOR ACROSS THE LIFESPAN.............................................................................12
Overview of the lecture......................................................................................................................................12
Socioemotional Selectivity Theory......................................................................................................................15
Example exam questions....................................................................................................................................15
LECTURE 4 PROSOCIAL BEHAVIOR................................................................................................................ 16
What is prosocial behavior?...............................................................................................................................16
Temporal myopia and uncertainty.....................................................................................................................18
Summary............................................................................................................................................................20
LECTURE 5 FINANCIAL RISK TAKING.............................................................................................................. 21
The efficient market hypothesis.........................................................................................................................21
Summary............................................................................................................................................................23
Example exam questions....................................................................................................................................23
LECTURE 6 UNDERSTANDING THE ECONOMY...............................................................................................24
Mental accounting in the context of gains & losses..........................................................................................25
How lay people understand economy................................................................................................................26
Examples:...........................................................................................................................................................27
LECTURE 7 SAVING & DEBT.......................................................................................................................... 28
1-1. Influencing internal (reflective) Motivation................................................................................................28
1-2. Influencing Reflective Motivation...............................................................................................................29
2. Influencing Automatic Motivation.................................................................................................................29
3-1. Influencing Social and Physical Opportunities............................................................................................31
3-2. Influencing decision making environment..................................................................................................31
Hyperbolic discounting.......................................................................................................................................31
Framing effects in intertemporal choice............................................................................................................32
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, 2-2: We will need to borrow money to start our own business.........................................................................33
2
, LECTURE 1 INTRODUCTION TO PEB
Everyday economic decision making setting goals, cognitive and emotional processes,
making choices, habits, physical and mental consequences of decisions.
Eg.: do you get coffee, do you cook at home, do you go out to eat, do you drink a glass of
wine every day, do you go to the same store, do you go by bike or car.
Economic approach: constructing a model that achieves an optimal outcome for an
‘average’ person
Psychological approach: investigating decision making processes of behaviors,
intentions/attitudes to behave in certain ways, given a wide range of
individual differences (values, beliefs, tendencies, traits, states, etc.)
How can psychology contribute to the “average man” in economic decisions?
Economic assumptions vs reality
Stable preferences (changes over time and over situations)
Self-interest (different interests play a role)
Maximization (not always maximizing utility)
No cognitive limitations (Not a supercomputing machine)
Unlimited will-power (Not always a motivated person)
Complete information (rarely the case of market transparency)
Long time perspective (not always a far-sighted person)
Faces are important for human perceptions (specific brain area). Recognition of faces and
emotions everywhere, secondary processes happen right away (good/friend vs bad/foe).
We don’t have the same recognition for faces we don’t see every day, which will
confuse the secondary processes (for example upside down, or an extra mouth)
Adam Smith: The Theory of Moral Sentiments (1759) Introducing psychological concepts
into economic situations. For example: importance of perspective taking, social interactions
on trading, connection between self and other well-being.
George Katona and Herbert Simon: Real-life events are better predicted by empirical data,
compared to theoretical modelling.
Daniel Kahneman and Amos Tversky
Heuristics and Biases in judgement
Prospect Theory
Risk aversion for losses
Richard Thaler
Mental accounting
Fairness
Self-control
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