Block 2

Individual Behavior

To describe the model of rational action

To understand some empirical findings that modify the theory: social preferences

Aim of Block 2

Rational .

Choice .

Theory

LECTURE 4

To understand what rational action implies

To understand the design of experimental studies in social sciences

Aim Lecture 4

Up Until NowSocial Problems are to be explained scientifically

Explanations should consider the link between individual and aggregate behavior

A theory of action is necessary

* We will use Rational Choice Theory for this purpose *

Central AssumptionRational Choice Theory

Decision-makers have logically consistent goals (whatever they are), and, given these goals, choose the best available option.

Rational ChoiceThe Model

AIM:

To explain the decisions of individuals and the individual, and, in particular, the social consequences of those decisions.

Core ElementsRational Choice Model

PreferencesConstraints

Beliefs

OptimalDecision

Outcome(Prediction):Equilibrium

Decision Theory

Social Interactions

Choice Depends On

How individuals rank the available alternatives according to their subjective tastes

Preferences:

In which stock you invest will probably depend on your expectations about the future earnings potential of that stock

Beliefs:

The set of alternatives that are available to an individual (i.e., Ferrari vs Ford)

Constraints:

Utility Maximization

Choose a feasible option that best satisfies the individual’s preferences

Individuals

Conditions on Preferences

An individual can compare all relevant alternatives and rank them

1. Complete

If you prefer A over B, and B over C, then you should prefer A over C

2. Transitive

The relative attractiveness of two options does not depend on other options available to the decision-maker

3. Independent of irrelevant alternatives

Sociology

Social outcomes of the interaction of individuals

Interested in:

Social outcomes from the Equilibrium perspective

Equilibrium Analysis

EconomicsBiologyNon-Life related sciences

Common to other fields

What is it?

It is a situation in which several things that have been interacting, adjusting to each other and to each other’s adjustment, are at last adjusted, in balance, at rest

(Schelling, Micromotives & Macrobehavior)

Equilibrium:

Examples Equilibrium

If prices from place to place do not differ more than transport costs between those places

Market for gasoline:

If, considering where everybody else is sitting, nobody is motivated to move to another seat

The seating pattern

The selfish assumption

Decision-makers are SELF-REGARDING

A common assumption in RCT is that:

(+) TRACTABILITY IN MODELING

Exact predictions, which can be confronted with appropriate data, that might refute the selfishness assumption

Experiments

Is it violated?

It seems to be violated by the fact that many people vote, even in anonymous situations, take part in collective actions, often manage not to overuse common resources, care for the environment, mostly do not evade taxes on a

large scale, donate, and so forth...

The selfish assumption

Don’t discard it yet!

Many factors might give even selfish individuals an incentive to behave pro-socially,

although they are not so motivated.

In reality

Repeated interactions

This is widely studied

*But first a practical*

In laboratory experiments

Practical 3

In the rational choice theory block we will participate in various canonical experiments

Lecture 4

Vernon SmithNobel Prize 2002

(shared with Kahneman)

Demand &

Supply

Experimental Studies

Social Sciences

in

We will cover

Experimental EconomicsWhat are experimental studies in Soc. Sc.

Example of how to coduct an experiment

Coherent ArbitrarinessThe experimental method

Procedural and design issues

What’s Experimental Economics?

Data are collected in a controlled enviornment

Discipline in which

becoming experimental sciences like physics or biology

Social Sciences

Like theoryrunning experiments is an established method to explain and/or describe social activity

Experimental MethodAdvantages of the experiments

ControlInstitutions (i.e., voting rules, communication, etc)Incentives (payoffs) - not always complete control (i.e., altruism)Randomization - avoids some self-selecting problems

ReplicationCheck for robustness, experimental effects, etcGives an incentive to do it rightMake available: data, instructions, program, and procedures

How to conduct an experiment

Example“Coherent Aribitrariness”

Dan Ariely, George Lowestein, Drazen Frelec

Are preferences stable or are they affected by irrelevant information?

How do people evaluate the value of a good?

Do we have preferences over goods we have not consumed?

Are preferences completely random?

Structure ExperimentResearch Question

Design

Treatment Variables

Session.

.

.

Ordinary GoodsValuing ordinary goods

Collection of sessions to evaluate a research question

Are preferences stable or are they affected by irrelevant information?

Are preferences completely random?

Description of the task performed by subjects

Ask subjects if they want to buy the good for a price equal to a random anchor

Random anchor: Last two digits of their Social Security Number (SSN)

Experiment:

Design:

Laboratory Experiments

They create decision-dependent financial incentives

To measurePeople’s behavior in situations in which true opportunity cost for their decisions exists, and are known by the researcher

Collection of sessions to evaluate a research question

Ordinary Goods

Description of the task performed by subjects

Ask subjects if they want to buy the good for a price equal to a random anchor

Random anchor: Last 2 digits of their Social Security Number (SSN)

Previous slideResearch Question:

Design:

Give monetary value to 4 goods (market value around $70)

Elicit their willingness to pay (WTP) for the good

Ordinary Goods

Environment/parameters of interest varied by the experimenter

High, middle, low anchors

Treatment Variables:

Between-subjects variations: different subjects get different parametersavoids “contamination” between treatments

+

Different qualities of similar goods+Within-subjects variations: same subjects get different parameters

Control for individual characteristicsMust control for sequence effects (i.e., due to learning)

Session: Group of subjects doing the experiment at the same timeOne session with 55 students

Ordinary Goods

Subjects with high SSNs pay more

Arbitrariness

Coherence:Subjects pay more for better goods

Cordless trackball < Cordless keyboardAverage wine < Rare wine

Last digits SSN

CordlessTrackball

CordlessKeyboard

AverageWine

RareWine

01-20 $8.64 $16.09 $8.64 $11.73

41-60 $13.45 $29.27 $12.55 $18.09

81-100 $26.18 $55.64 $27.91 $37.55

Novel Goods

Subjects listen to annoying sounds for 30 seconds Hypothetical question asking whether they are willing to listed

to the sound for 300 seconds for a payment equal to the anchor Anchor: First 3 digits of their SSN Elicit their willingness to accept (WTA) “X” seconds of the

sound

Research Question:

Design:

How do we form preferences of goods we have not consumed?Is there a stable valuation of hedonic experiences (pleasure or pain)?

Ascending x=100, 300, 600Descending x=600, 300, 100

Novel Goods

High, middle, low values of “X”

Treatment Variables:

Between-subjects treatment variables:

+

Ascending or descending sequences of “X”+

Within-subjects treatment variables:

Session:One session with 90 students

High and low anchors (above or below the median)+

Novel Goods

Subjects willingness to accept is lower for low anchors

Arbitrariness

Coherence:Willingness to accept increases with duration

but signiécant interaction between anchor and duration[F(2,176) 5 4.17, p 5 0.017].

If subjects have little idea about how to price the soundsinitially, and hence rely on the random anchor in coming up with

TABLE II

The eventMeanrank

1 Missing your bus by a few seconds 4.32 Experiencing 300 seconds of the same sound you experienced 5.13 Discovering you purchased a spoiled carton of milk 5.24 Forgetting to return a video and having to pay a éne 5.45 Experiencing a blackout for an hour 5.86 Having a blood test 6.07 Having your ice cream fall on the èoor 6.08 Having to wait 30 minutes in line for your favorite restaurant 6.29 Going to a movie theater and having to watch it from the second row 6.7

10 Losing your phone bill and having to call to get another copy 7.311 Running out of toothpaste at night 8.1

The different events that subjects were asked to order-rank in terms of their annoyance, at the end ofExperiment 3. The items are ordered by their overall mean ranked annoyance from the most annoying (lowernumbers) to the least annoying (high numbers).

FIGURE IIIMean WTA (in Dollars) for the Three Annoying Sounds

The data are plotted separately for subjects whose three-digit anchor was belowthe median (low anchor) and above the median (high anchor). Error bars are basedon standard errors.

86 QUARTERLY JOURNAL OF ECONOMICS

Coherence Arbitrariness

Valuations are highly sensitive to arbitrary anchor values

Summary

For all goods?

After an initial valuation, choices are coherent

Initial choices exert a large effect on subsequent choices

Back to experimental design

Partners: always play with same group+

More Jargon

Matching Procedures: way of grouping subjects in repeated games

Strangers: randomly rematched before playing each game+Absolute Strangers: Subjects do not play with the same subject more than once

+

Incentive Compatible:Monetary incentives are aligned with the variable of interest (it doesn’t pay to lie)

The Experimental Method

Theory testing/selection+

Goals for an experiment

Search for empirical regularities+

Advice policy makers+

The Experimental Method

Lack of realism+

Some objections:

Representativeness of subjects+

Can lower costs+

Deception

Easier to study rare situations (Milgram-authority obedience)+

Advantages

Easier to design experiments+

Lost of control of+Disadvantages

Subjects don’t believe the instructionsSubjects try to outguess the experimenter

Experimental Method

Checklist Rational actors have preferences that allow them to

choose best

RCT makes predictions that can be tested experimentally

Experimental studies in social sciences have a specific theory-based structure

Questions?