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.
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?
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
G. Public Choice
H. ECONOMIC ANTHROPOLOGY
Topic 2. Economic Interpretations of Human Behavior
A. The Economic Problem: Scarcity
1. Scarcity and Decisionmaking: Scarcity makes decisions necessary.
2. Decisions and Costs: All decisions entail alternatives that are costly (in an economic sense).
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, …, qn),
where qi (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.
“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 + … + pnqn.
where pi (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).
b. The Notion of Rationality
Economists commonly assume that choices intended to maximize satisfaction are made rationally.
c. Irrationality and arationality
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.
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.
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?
f. Enlightened Self Interest: Naïve Egoism?
Topic 3. Alternative Interpretations of Human Behavior and Motivation
A. An Overview of Some Non-Economic Interpretations of Human Behavior
a. Psychoanalysis (SIGMUND FREUD: The Interpretation of Dreams)
i. Psychoanalysis and the Primacy of the Unconscious
(a) Ego (b) Superego (c) Id …
b. Deterministic Behaviorism
i. IVAN PAVLOV and his dogs
ii. B.F. SKINNER and the Skinner Box
c. ABRAHAM MASLOW (1908-1970) and a Hierarchy of Needs
i. Physiological Needs – food, clothing, and shelter
ii. Safety—security that our physiological needs will be met.
a. Physical Psychology
ii. Schizophrenia and the life of John Nash, A Beautiful Mind
iii. Valium, Prozac, Zoloft, LSD, marijuana, and other psychoactive drugs.
a. TALCOTT PARSONS: Class, Status, Power, and the Pecking Order
b. Thorstein Veblen: The Theory of the Leisure Class
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
a. E.O. Wilson
b. The Selfish Gene
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
iii. Carl Menger
iv. Leon Walras
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’”
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
c. George Akerlof (Addiction and procrastination) [Nobel prize winner]
d. Robert Frank
6. BEHAVIORAL FINANCE
a. John Maynard Keynes: Are investors herd-like? The Keynesian “Beauty” Contest
b. Robert Shiller (Irrational Exuberance)
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
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?
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.?
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?
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?
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?
  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)