HUMAN BEHAVIOR AND THE ECONOMIC WAY OF THINKING Proposed Course Links to Honors Theses	Ralph Byrns (PhD: Rice University) Adjunct Professor 2001 – Office: 005 Gardner Hall Department of Economics University of North Carolina Chapel Hill, NC 27599 - 3305
	Phone: 919-843-6268 e-mail. rbyrns@unc.edu Emergencies: 919-932-9927 Cell: 919-618-9993

Human Behavior and the Economic Way of Thinking will focus on decision-making in everyday life, the economic implications of current events, interesting bits of behavioral research we discover as the course progresses, and the consequences of economic choices for both decisionmakers and other parties. Although most of the activities addressed in this course will be viewed through the lens of economic reasoning, interpretations of behavior drawn from other disciplines (e.g., history, philosophy, sociology, psychology, anthropology) will also be emphasized.

Topic 1. A Brief Taxonomy of the Behavioral Sciences

Most taxonomies (classification systems), including this one, are unavoidably messy. Virtually all disciplines overlap somewhat in some ways. Examples include the shared use of the scientific method and mathematics, or reliance on certain paradigms.[1]

Behavioral sciences have a somewhat different focus than most non-behavioral disciplines – e.g., the arts, languages, or the physical and social sciences. Behavioral sciences reflect attempts to study behavior systematically: How do people behave? Why do they behave as they do? What are the consequences of their behavior?

Discussion:

Some disciplines (e.g., physics) seem to deal, at most, tangentially with behavior. To what extent do disciplines other than psychology, sociology, anthropology, and economics address human behavior? [E.g., history, literature, demography, linguistics, geography, political science, art, or biology.] What commonalities, if any, distinguish behavioral disciplines from other areas of study?

A. Anthropology

[biography]

Anthropology is the study of similarities and differences in the socio-cultural and biological behaviors of human populations in all periods and in all parts of the world.

B. Economics

[glossary]

Economics is the study of how individuals and societies allocate their limited resources in attempts to satisfy their unlimited wants.

C. Psychology

Psychology is a scientific discipline that studies mental processes and emotions, and how they affect the behavior of humans or animals.

D. Sociology

Sociology is the study of human social behavior, especially the study of the origins, organization, institutions, and development of human society.

Intersections among these four broad behavioral sciences and across such related fields of study as political science, demography, and biology have yielded numerous subdisciplines, including:

E. Behavioral Economics

[glossary]

Behavioral economics draws from the perspectives of psychology (and to a lesser extent, from anthropology, and sociology) to identify and explain human behavior that seems inconsistent with orthodox economic assumptions that decisionmaking is invariably rationally efficient and grounded in self interest.

F. SocioBiology

[links]

Sociobiology is a discipline that emphasizes genetics and evolutionary theory to study the social, cultural, and economic behavior of humans and animals. All organisms are assumed to behave in ways that optimize the perpetuation of the organism’s gene pool.

G. Public Choice

Public Choice is an amalgam of political science and economics that interprets political behavior as a reflection of self interest, emphasizing the study of voting, legislative and regulatory processes, and bureaucratic behavior.

H. ECONOMIC ANTHROPOLOGY

Economic anthropology is the study of interdependencies between economic processes and the milieu of institutional and socio-cultural conventions that influence economic processes. Individual and social human behaviors both influence economic processes and reflect economic processes. [See also American institutional economics.]

Topic 2. Economic Interpretations of Human Behavior

A. The Economic Problem: Scarcity

Scarcity, the basic economic problem, exists because our limited resources and technologies cannot produce sufficient goods to fully satisfy our unlimited wants.

Discussion:

Are humans insatiable? While the idea of being beyond a satiation point through over-consumption of particular goods (e.g., caviar, leisure time, or sex) is easily imagined, is anyone ever so satisfied with every aspect of life that all further desire is extinguished? Consider the Hindu concept of nirvana … an idealized state of wanting nothing more.

1. Scarcity and Decisionmaking: Scarcity makes decisions necessary.

Scarcity (we can’t have everything we want) requires every society to answer three (or should it be five?)

BASIC ECONOMIC QUESTIONS.

1. What? What combinations of goods will be produced?

2. How? Which technologies will be used to produce these goods?

3. For whom? Who will use the goods produced?

4. When? Will we use resources now, or soon, or will we conserve them for future generations to use?

5. Who decides? Shall these decisions be made by private individuals or by government?

2. Decisions and Costs: All decisions entail alternatives that are costly (in an economic sense).

The opportunity cost of any choice is the subjective value of the best alternative foregone – the value of the other opportunities you sacrifice, or forego.

B. Economic Interpretations of Human Behavior

1. Classical Economics

a. Human motivation: Utility maximization.

The conventional wisdom of economists is that all human behavior reflects individuals’ attempts to make themselves happy by maximizing their constrained consumer utility functions. Borrowing the concept of utility from philosopher JEREMY BENTHAM (1748-1832), economists use the word “utility” almost synonymously with satisfaction, happiness, or pleasure. A utility function (U) can be written as:

U = U(q₁, q₂, q₃, …, q_n),

where q_i (i=1, …, n) is the quantity of a specific good, service, or event. Each q could stand for anything that makes a person happy – examples include apples, affection from a significant other, or an A+ in an especially challenging course.

Discussion:

Can excessive quantities turn some goods into bads? De gustibus non disputandum? Do people have the same basic wants? If so, is how much we enjoy particular things related primarily to our genes (pleasure receptors?) or is our enjoyment a learned response – a reflection of the culture in which we live?

“Optimization” is the process of maximizing any constrained function. Maximization of the utility function is constrained by the choices available – the budget constraint. A budget constraint, Y, can be expressed by the equation:

Y = p₁q₁ + p₂q₂ + p₃q₃ + … + p_nq_n.

where p_i (i=1, …, n) is the price per unit (opportunity cost) of each specific good, service, or event. (Thus, p₁q₁, for example, is the total spending on good 1.) This budget constraint is not limited only by money income. It also considers, at least conceptually, such constraints on choices as time, the types and amounts of our assets (e.g., a home) and liabilities (e.g., a debt), individuals’ physical and mental attributes, and the environment in which we find ourselves (e.g., laws, climate, or gravity).

Discussion:

Do such personal decisions as marriage conform to an economic model? Is a spouse merely the best choice available – do people marry whom they marry because they don’t reasonably expect to find a better candidate at a lower cost?

b. The Notion of Rationality

Economists commonly assume that choices intended to maximize satisfaction are made rationally.

Discussion:

Do we make choices rationally and dispassionately? And what does rational mean?

Rational choices are expected to be consistent with one’s goals, and are determined primarily by opportunity costs—preferences, budgets, and relative prices.

An irrational passion for dispassionate rationality will take all the joy out of life.

John Maurice Clark

c. Irrationality and arationality

Irrational choices cannot reasonably be expected to be consistent with one’s goals. Certain behaviors, especially those entailing tastes or aesthetic, are arational – how beautiful you consider a sunset to be, for example, has little to do with reason.

Discussion:

Are humans as rational as orthodox economics assumes?

Prospect theory is the label Daniel Kahneman and Amos Tversky gave to the findings of their studies about whether individuals behave rationally when confronted with decisions in which the outcomes are risky or uncertain. Prospect theorists have recorded many instances in which the rationality of decisionmakers is suspect.

Examples:

Kahneman’s research suggests that at times relative values, not absolute values, drive decisions, when economic rationality would suggest that the absolute value should dominate if a decision is rational. For example, he found that many people will drive across town to save $5 on a $15 calculator, but not drive across town to save $5 on a $150 coat. Why?

Discussion:

Why will people drive across town to save $15 when buying a shirt, but not to save $15 on a new car? Why will people who clean their own houses to save the $80 a cleaning service would charge not clean other people’s houses if offered $80 or more to do so?

THORSTEIN VEBLEN (1857-1929), an early member [the founder?] of a school of thought called institutionalism, was among the most vitriolic of economists who dispute the notion that people make rational decisions.

The hedonistic conception of man is that of a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire ... under the impulse of stimuli that shift him about the area but leave him intact ... He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another ... When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before.

Thorstein Veblen

"Why is Economics not an Evolutionary Science?"

Quarterly Journal of Economics

vol. 12, 1898, p373

d. Adam Smith, The Theory of Moral Sentiments, 1758

Suppose you sliced off your pinkie while buttering your toast tomorrow morning. If you then heard on the Today show that an earthquake had swallowed most of China, causing 1.3 billion deaths, which event would bother you more? Adam Smith (1723-1790), the founder of modern economics, had one answer.

. . . loss of a little finger would keep the average European from sleeping through the night, but, provided he never saw them, he would snore most profoundly over the loss of millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him than this paltry misfortune of his own.

Adam Smith, The Theory of Moral Sentiments, 1758

Smith went on to say that, nevertheless, most individuals would sacrifice their little fingers to save someone else’s life, primarily because we all like to think of ourselves as “good people.” But how much would we be willing to sacrifice? An arm or leg? Our own lives?

e. Humanitarianism?

Discussion:

Does altruistic behavior pose a paradox for economic theory? Consider, for example, the life of Mother Teresa, or survivors who donate organs from deceased loved ones. (Might more people donate organs if monetary compensation were not illegal?)

f. Enlightened Self Interest: Naïve Egoism?

Discussion:

To what extent do individuals base their behavior on narrow self interest? Do circumstances matter? And do interactions within families unfailingly reflect narrowly self-interested behavior? (Does sociobiology offer better insights?)

Topic 3. Alternative Interpretations of Human Behavior and Motivation

A. An Overview of Some Non-Economic Interpretations of Human Behavior

1. Psychology

a. Psychoanalysis (SIGMUND FREUD: The Interpretation of Dreams)

i. Psychoanalysis and the Primacy of the Unconscious

(a) Ego (b) Superego (c) Id …

Discussion:

Is behavior deterministic, and is it really all just about sex?

b. Deterministic Behaviorism

Determinism is the metaphysical theory that everything in the universe, including human behavior, is governed by physical and chemical laws. In a metaphoric sense, every object in the universe is merely an operating part of a dynamic machine, and if one fully understood the laws of science, then all of history could be explained by mathematical equations.

Discussion:

Milton Friedman is among many orthodox economists who assert that we are “Free to Choose” [actually the title of one of his books], but such economists believe that virtually all decisions are precisely explicable consequences of a rational optimization process that can be described mathematically. Does the concept of freedom have meaning in a mathematically deterministic world?

Economics is all about how people make choices. Sociology is about why there isn’t any choice to be made.

James Duesenberry

i. IVAN PAVLOV and his dogs

Discussion:

How much of our behavior is simply conditioned reflex?

ii. B.F. SKINNER and the Skinner Box

c. ABRAHAM MASLOW (1908-1970) and a Hierarchy of Needs

Though human society is naturally conditioned by economic factors, the motives of human individuals are only exceptionally determined by the needs of material want-satisfaction.

Karl Polanyi

“Classic economic theory, based as it is on an inadequate theory of human motivation, could be revolutionized by accepting the reality of higher human needs, including the impulse to self-actualization and the love for the highest values.”

Abraham Maslow

i. Physiological Needs – food, clothing, and shelter

Discussion:

What are the minimal requirements for survival? How much funding would you require, annually, to minimally sustain your life?

Fact:

Many people in less-developed societies survive on much less than the monetary figure typical students identify. How do they survive? What are their lives like?

“Life in a state of nature is nasty, brutish, and short.”

Thomas HOBBES (1588-1679) Leviathan

Activity:

Go on-line to ascertain average per capita incomes of people in six different third world countries. They survive on much less than the funding you’ve probably indicated you require. How do they survive?

ii. Safety—security that our physiological needs will be met.

Discussion:

One common perception is that women tend to be far more risk averse than men, and are more driven by security needs than men. Is this perception true? If it is true, how might we account for this difference? Why are life insurance policies on men typically for higher amounts than life insurance policies on women?

iii. Love

iv. Esteem

v. Self-actualization

Discussion:

1. Do Maslow’s hierarchies seem reasonable? 2. Do economists typically assume that humans, on average, are stuck at Level 1 or 2?

a. Physical Psychology

i. Krick and Watson: DNA and the human genome project

ii. Schizophrenia and the life of John Nash, A Beautiful Mind

iii. Valium, Prozac, Zoloft, LSD, marijuana, and other psychoactive drugs.

iv. Alzheimer’s

Discussion:

Does blood chemistry shape our behavior, as many psychologists and pharmaceutical companies increasingly seem to believe?

2. Sociology

“… nothing human is foreign to me.”

Auguste Comte [1798-1857]

founder of logical positivism

and modern sociology.

a. TALCOTT PARSONS: Class, Status, Power, and the Pecking Order

Discussion:

Are economic utility functions dependent solely on how goods satisfy physical needs and predilections?

Reading

G. Stigler and G. Becker, “De Gustibus Non Disputandum.” American Economic Review [Translation: “About Tastes there is No Dispute”.]

Discussion:

Does everyone really want the same thing?

b. Thorstein Veblen: The Theory of the Leisure Class

Discussion:

To what extent do homes, cars, wardrobes, etc., reflect “conspicuous consumption”?

3. Anthropology

a. Cultural Anthropology: Franz Boaz

b. Nature vs. Nurture: Boaz et al vs. the 1930s Eugenicists

c. Margaret Meade Coming of Age in Samoa

d. Robert Ardrey: African Genesis, The Territorial Imperative

e. Desmond Morris: The Naked Ape

f. Joseph Campbell: Myths, Rituals, and Symbols

Discussion:

Nature vs. nurture. Are we primarily reflections of our genes, or of the environment in which we are raised?

4. SociobiologY

a. E.O. Wilson

b. The Selfish Gene

Discussion:

Is the fundamental drive procreation (and not sex per se)? Do we exist primarily to pass on genes to future generations? Do circumstances arise in which there are apparent conflicts between homo economicus assumptions and the selfish gene? And why do males in all species tend to be less monogamous than females?

5. Geography

a. Robert Ardrey, The Territorial Imperative

b. Imperialism and “Manifest Destiny”

c. Hegemony and the Rise and Fall of Empires

B. Alternative Economic Interpretations of Human Behavior

1. Orthodox Economic Theory

a. Marginalism and Optimization

i. Jules Dupuit

ii. Antoine Augustin Cournot

iii. Carl Menger

iv. Leon Walras

v. William Stanley Jevons

vi. Francis Ysidro Edgeworth

vii. John Hicks

viii. Paul A. Samuelson

b. Equilibrium and Efficiency

ix. Alfred Marshall (Partial Equilibrium Analysis)

x. Leon Walras (General equilibrium Analysis)

xi. Vilfredo Pareto

2. Marxism: Dialecticism Materialism

a. The “Dialectics” of Georg Hegel

b. The “Materialism” of Ludwig Feurbach.

c. Karl Marx and Friedrich Engels: Dialectical Materialism

d. Mao Zedong: “Cultural Revolution and ‘The New Man in China’”

Discussion:

Are we programmed to behave in ways that further the interests of the socio-economic class in which we were raised? Is apparently self-interested behavior merely a reflection of a capitalist ethos? Can children be raised so that, as adults, they will put the wellbeing of the group (or nation, or of all humankind) ahead of their own narrowly personal interests?

3. Institutionalism

a. Thorstein Veblen

b. John Commons

c. Clarence Ayers

d. Wesley Clair Mitchell

e. John Kenneth Galbraith

4. Buddhist Economics: Mahatma Gandhi and E.F. Schumacher

5. BEHAVIORAL ECONOMICS

a. Daniel Kahneman [Nobel Prize winner] and Amos Tversky (Prospect Theory)

b. Richard Thaler – Economic Anomalies

An economic anomaly is a behavior that seems inconsistent with the orthodox economic concept of rationality.

Activity:

Experiment … Take a survey of everyone in class by asking each to specify the time on their watches. The average time reported is likely to be at least two or three minutes ahead of the official time per the U.S. Bureau of Standards. Are many people trying to fool themselves about the time of day? Or is there an orthodox interpretation of this phenomenon?

c. George Akerlof (Addiction and procrastination) [Nobel prize winner]

d. Robert Frank

Discussion:

How do expectations that others will behave in self-interested fashion rather than cooperatively reduce our own willingness to cooperate, so that we fail to be cooperative and instead act in narrowly self-interested ways?

Activity:

Experiment … Can we replicate Robert Frank’s test to ascertain whether training in economics causes people to tend to be less cooperative in a prisoner’s dilemma game? Or do individuals with a predilection to interpret behavior as self-interested tend to be the ones most likely to study economics? Are economics majors “more rational?’ [Sue-Byrns research.]

6. BEHAVIORAL FINANCE

a. John Maynard Keynes: Are investors herd-like? The Keynesian “Beauty” Contest

b. Robert Shiller (Irrational Exuberance)

Discussion:

How much conformity is advantageous in the world of business?

Other topics will include how we determine when decisions are “correct” and why some decisions seem wrong in retrospect. Recent analyses of how individuals process and act on information will be addressed. (Should you attempt to save time by using a shortcut through a dark alley? Is divorce an indicator of flawed decisionmaking?) Other everyday behaviors to be covered will include decisions about [a] education (is education an investment?), [b] courtship (what insights does rationality bring to explanations of sexual activity?), [c] marriage (when? to whom?), [d] family decisions (when should you have children, and how many?) [e] personal investment (is it to early to start saving?), [f] careers (how do you find a job? What negotiation strategies work well? Is the job-search process very different from searching for a spouse?)

Behavioral and Information Economics

Questions to Ponder

Transaction Costs

1. Why are the attendance records of typical professors significantly better than the attendance records of typical students?

2. Will customers usually have to wait longer in line to buy a Big Mac in a bustling urban center or out in the suburbs?

3. Why are tourists frequently stereotyped as gullible and bumbling targets for scams?

4. Why are people more likely to throw away parking tickets if they are ticketed while visiting distant cities or other states?

5. Why do property crimes tend to be relatively less significant (e.g., per capita or as a percentage of income) in small towns than in big cities?

6. Why do middle-aged females who invest in the stock market typically do better (higher average rates of return) than young men who invest in the stock market?

7. Why do today’s grocery shoppers require larger carts than their parents did thirty years ago?

Possible Answers?

Today’s working women can’t shop every week the way their mothers did; they (or their husbands) must stock up more on each infrequent trip. Or: Today’s working women can’t cook dinner for the entire family as their mothers did; instead they buy enough food so that mom, dad, and the kids can all fend for themselves. Or: Today’s wealthier families serve a greater variety of dishes at each meal. Or: Today’s wealthier shoppers are willing to pay higher grocery prices for luxuries like wide aisles and the carts those aisles can accommodate. Or: Today’s larger houses provide more storage space in the pantry. Or: Today’s ubiquitous ATM machines mean that shoppers are no longer constrained by their unwillingness to carry lots of cash.

Economics of Information

8. Why do most professional businessmen wear ties?

9. Why do new graduates usually carry brief cases instead of book bags when they interview?

10. Why do speeders slow down after they pass an officer issuing a citation on the side of the road?

11. Why are mortgage lenders increasingly willing to make loans that exceed the value of the property being purchased by the homeowner?

Risk and Uncertainty

12. Why are young people more likely than older people to parasail, climb mountains, hang-glide, or parachute?

13. Why do most two-earner families carry less life insurance in total than one-earner families with comparable total income and numbers of members?

14. Why do two-earner families generally save less than one-earner families with identical incomes, identical ages, identical numbers of children, etc.?

Possible Answers?

Is it because the two-earner family hires a housekeeper? Is it because working mothers care less about their children’s future than stay-at-home mothers do? Is it because working mothers provide such good role models that their children can make it on their own without a large inheritance, thereby making insurance or some other “nest-egg” less important than in the past? Or is it because a two-earner family is in less dire straits if one of the breadwinners becomes disabled than would be the case for a one-earner family?

Behavioral Economics

15. Are we constrained by institutional factors and driven by experiences from childhood?

16. Why might perfectly rational people gamble by flipping coins, or playing poker, backgammon, or dominoes, but they would never even bother playing chess or checkers or tic-tac-toe, even “for fun?”

17. Which firms would you expect to be more likely to inflate their income statements and balance sheets? Firms experiencing downturns in their sales revenues and profits, firms with relatively stable revenues and profits, or firms experiencing significant real growth of revenues and profits? Why?

18. Would you expect firms that acquire other firms to be more prone to dismiss their own employees when they consolidate, or the employees of the firm being acquired? Would acquiring firms be more prone to dispose of assets previously owned and controlled, or the assets of the firm being acquired? Explain the sense in which your predictions about this behavior are consistent with the conventional assumption of profit maximization, and the sense in which your answers are inconsistent with the standard profit assumption?

19. Why, in every culture, are men far more likely than women to commit suicide?

Possible Answers?

Is it because women feel a greater obligation to continue caring for their offspring? Or is it because women live longer, and can therefore look forward to surviving the spouse who is making life unbearable?

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[1] [1] The evolving environment of scientific inquiry, broadly considered, is explored in The Structure of Scientific Revolutions, Thomas Kuhn’s 1962 book, which made the phrase “paradigm shift” a part of the lexicon of virtually all methodologists throughout the sciences. (http://www.brint.com/kuhn.htm)