DECISION-MAKING Ph.D. Special Fields Seminar – Winter 2013

Course Coordinator:  Professor Neil Bendle

This course provides a survey of recent theoretical advances in decision-making. This includes a look at areas at the intersection of psychology and economics such as judgment and decision making, behavioural decision theory, experimental economics and behavioural game theory. We will also consider evolutionary thinking in psychology and markets and draw out the implications of this for individual decision making.

Sessions Overview

1. Winning A Nobel Prize In Decision Making
2. How Do People Make Decisions?
3. The Schools of Thought
4. Trust and Morality
5. The Endowment Effect and Mental Accounting
6. Social Preferences
7. Preference Formation and Altruism
8. Applying Decision Making
9. Framing and Reference Pricing
10. Temporal Issues
11. Evolution and Markets
12. Applying Rationality

Week 1 Winning A Nobel Prize In Decision Making

This week we look at the work of probably the most famous scholars in the field Amos Tversky and Daniel Kahneman. We also consider Herbert Simon the forefather of the field and some of its most effective contemporary scholars. The key question is addressed: Is Homo Economicus an accurate depiction of decision making?

Readings

Simon H., (1955) A Behavioral Model of Rational Choice, The Quarterly Journal of Economics, 69 1 99-118

Tversky, A. & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and Biases. Science, 185 (4157), 1124-31

Kahneman, Daniel, and Amos Tversky (1979), “Prospect theory: An Analysis of Decision Under Risk,” Econometrica, 47, 263-291.

Camerer, C., Babcock, L., Loewenstein G.,and Thaler, R. (1997) Labor supply of New York City cabdrivers: One day at a time. The Quarterly journal of economics,112 (2) 407-441

Discussion Questions

1)  Do we need realism in economic decision making models? If so what does it get us?

2)   Why is Kahneman and Tversky’s work so popular? Did Kahneman deserve his Nobel Prize?

3)   What is prospect theory about? What are the key elements

4)   How does Camerer et. al.’s approach differ from Kahneman and Tversky’s? How would you criticize Camerer et. al.’s approach if you wanted to? Do you want to?

Additional Reading

Kahneman, D. (2002). Maps of bounded rationality: a perspective on intuitive judgment and choice Nobel Prize Lecture, December 8, 2002

An overview of the work that go Kahneman, a psychologist, the 2002 Nobel prize in Economics.


Week 2: How do People Make Decisions?

This week we will look at ways people are thought to make specific decisions.

 Readings

Daniel G. Goldstein and Gerd Gigerenzer (2002) Models of Ecological Rationality: The Recognition Heuristic, Psychological Review 109 (1), pg. 75-90

Staw, B., and Hoang, H., (1995) Sunk costs in the NBA: Why draft order affects playing time and survival in professional basketball Administrative Science Quarterly (40)3 474-494

Hedgcock, W., Rao, A., and Chen, A., (2009) Could Ralph Nader’s Entrance and Exit Have Helped Al Gore? The Impact of Decoy Dynamics on Consumer Choice, Journal of Marketing Research, 46, (3) 330-343

Cosmides, L., and Tooby, J, (1996) Are humans good intuitive statisticians after all? Rethinking some conclusions from the literature on judgment under uncertainty, Cognition 58 (1) 1-73

Discussion Questions

1) Do people know they are influenced by a heuristic or bias? Is there a difference between a decision people will recant when offered evidence than one where they continue to argue they made the right decision?

2)Should we expect to know how we make our decisions? Do we have access to how decisions are made?

3) Are managers different to consumers in their decision making? Why?

4) Why does it matter whether humans are good intuitive statisticians? How can we prove it either way?


Week 3: The Schools of Thought

This week introduces controversies in the world of decision making. Kahneman, and what is called the heuristics and biases school, has rightly or wrongly been more influential on current business research in North America. We also look at the role of decision making in business.

Readings

Alchian, A., (1950) Uncertainty, evolution, and economic theory, Journal of political economy 58 (3) 211-221

Kahneman, Daniel, and Amos Tversky (1996) On the reality of cognitive illusions. Psychological Review, Vol 103(3), 582-591

Gigerenzer, G. (1996) On narrow norms and vague heuristics: A rely to Kahneman and Tversky (1996). Psychological Review, 103 (3), 592-596.

Cosmides, L., and Tooby, J., (1994) Better Than Rational: Evolutionary Psychology and the Invisible Hand, The American Economic Review, 84 (2) p327-332

Discussion Questions

1) What is Alchian’s view of competition and how does this relate to individual decision making?

2) What is being studied in the heuristics and biases program of research?

3) What do you think of Gigerenzer’s critique of the heuristics and biases program of research?

4) What do evolutionary psychologists have to say to economists?

Additional Reading

Friedman, M. (1970).The Social Responsibility of Business is to Increase its Profits, The New York Times Magazine, September 13, 1970

·       When reading this consider what the role of individual decision making is in Friedman’s view of business decision making.


Week 4: Trust and Morality

This week considers the debate about decision making a broader social context. We also introduce the use of economic experiments highlighting the different approaches used by people in different fields.

Readings

Berg, J., Dickhaut, J., McCabe, K., (1995) Trust, Reciprocity, and Social History, Games and Economic Behavior Volume 10, Issue 1, July 1995, Pages 122–142

Joseph Henrich, Robert Boyd, Samuel Bowles, Colin Camerer, Ernst Fehr, Herbert Gintis and Richard McElreath (2000) In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies The American Economic Review Vol. 91, No. 2, pp. 73-78

Nancy R. Buchan, Rachel T.A. Croson, Sara Solnick (2008) Trust and gender: An examination of behavior and beliefs in the Investment Game Journal of Economic Behavior & Organization 68  466–476

Mazar, N, Amir, O and Ariely, D (2008) The Dishonesty of Honest People: A Theory of Self-Concept Maintenance, Journal of Marketing Research Volume 45, Issue 6, p. 633-644.

Discussion Questions

1)Are economists just bad experimenters?

2) Should you pay experimental subjects? What are the unique difficulties of economic experiments?

3) How do behavioural assumptions influence strategy?

4) Does this research make you feel better or worse about people?

Additional Reading

Kramer, R. (2002) When Paranoia Makes Sense, Harvard Business Review, July 2002

When reading this consider whether paranoia makes sense


Week 5:  The Endowment Effect and Mental Accounting

A popular topic of study in judgment and decision making is the endowment effect. This has potentially important implications for the operation of markets.

Readings

Thaler, Richard (1985) “Mental Accounting and Consumer Choice,” Marketing Science, 4 (Summer), 199-214.

Knetsch, J.L. (1989), “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” The American Economic Review, 79 (5), 1277-1284.

List, J., (2003) Does Market Experience Eliminate Market Anomalies? The Quarterly Journal of Economics 118 (1) 41-71.

Heath, Chip and Jack B. Soll (1996), “Mental Budgeting and Consumer Decisions,” Journal of Consumer Research, 23 (June), 40-52.

Discussion Questions

1) Why does the endowment effect matter to economists?

2) How do List’s methods differ from other researchers? What is he saying about behavioural effects in markets?

3) Once you understand the endowment effect, try and come up with a) three marketing applications for it and b) three interesting new research questions using it.

4) What is your opinion of the construct “mental account”? What is it? How does it work?

5) What are the market implications of mental accounting?

 

Week 6: Social Preferences

Here we consider what happens when people have preferences that include other people’s behaviour and outcomes as a determinant of the utility the person receives.

Readings

Amaldoss, W., and Jain, S., (2005) Pricing of conspicuous goods: A competitive analysis of social effects, Journal of marketing research 42 (1) 30-42

Armstrong, J. S., and Collopy, F., (1996) Competitor orientation: Effects of objectives and information on managerial decisions and profitability, Journal of marketing research 33 (2) 188-199

Cui, T., Raju, J., Zhang, J., (2007) Fairness and Channel Coordination, Management Science August 2007 vol. 53 no. 8

Sundie, J., Kenrick, D., Griskevicius, V., Tybur, J., Vohs, K., Beal, D., (2011) Peacocks, Porsches, and Thorstein Veblen: Conspicuous Consumption as a Sexual Signaling System, Journal of Personality and Social Psychology, 100 (4), 664-680

 Discussion Questions

1) What exactly are Amaldoss and Jain testing?

2) Is the thesis of Armstrong and Collopy’s work controversial? If so to whom?

3) Does decision making help explain puzzles or just give another way to complicate analytical models?

4) What is optimization in a world of social preferences?

Additional Reading

Kurzban, R., Tooby, J., and Cosmides, L., (2001).Can race be erased? Coalitional computation and social categorization, PNAS December 18, 2001 vol. 98 no. 26

Moral Sentiments and Material Interests: Origins, Evidence and Consequences by Gintis, H.,Bowles, S., Boyd, R. and Fehr E. Chapter1 in Moral Sentiments and Material Interests: The Foundations of Cooperation in Economic Life from Gintis, H.,Bowles, S., Boyd, R. and Fehr E. (2005) MIT press.


Week 7:    Altruism and Preferences

How consumers make decisions is a critical part of marketing and other business research. Here we discuss what a makes an “acceptable” preference.

Readings

Leonard Lee, On Amir, and Dan Ariely (2009) In Search of Homo Economicus: Cognitive Noise and the Role of Emotion in Preference Consistency Journal of Consumer Research 36 (2)

Fehr, E., and Gächter., S, (2000) Cooperation and punishment in public goods experiments The American economic review 90 4 980-994

Krishna, A., (2011) Can supporting a cause decrease donations and happiness? The cause marketing paradox. Journal of Consumer Psychology, 21, 338-345

Bowles, S., and Gintis, H., (2011) Parochialism, Altruism and War, Chapter 8 from A Cooperative Species by Bowles, S., and Gintis, H., Princeton University Press

Discussion Questions

1) Where do preferences come from?

2) What are the implications of unstable preferences?

3) What is altruism?

4) Is selfishness vital to rationality? If not why not?

5) Are altruists doomed?

Additional Reading

Lichtenstein, S., and Solvic, P. (2006) The Construction of Preference: An Overview Chapter 1 from The Construction of Preference by Lichtenstein, S., and Solvic, P. Cambridge University Press

Trivers, R., (1971) Evolution of Reciprocal Altruism, The Quarterly Review of Biology, Vol. 46, No. 1. (1971), pp. 35-57

 

Week 8: Applying Decision Making

This week we consider applying decisions making to specific business decision contexts.

Readings

Student Choice of a paper

Benartzi , S., and Thaler, R., (1995) Myopic Loss Aversion and the Equity Premium Puzzle The Quarterly journal of economics 110 (1)

Lau, R., and D.P. Redlawsk (2001) Advantages and disadvantages of cognitive heuristics in political decision making American Journal of Political Science 45 (4) 951-971

Griskevicius, V., Cantu, S, & Van Vugt, M. (2012). The evolutionary bases for sustainable behavior: Implications for marketing, policy, and social entrepreneurism, Journal of Public Policy and Marketing , Vol. 31 (1) Spring 2012, 115–128

Discussion Questions

1) Does context matter to decision making? In what ways? How can we test context?

2) What disciplines can learn from behavioural research? Which can’t?

3) Think of a topic in your field where considering decision making could help solve a puzzle.

 

Week 9:    Framing and Reference Pricing

Here we consider topics with clear marketing and consumer research applicability.

Readings

Camerer, C., Lim, N., & Ho, T., (2005) Modeling the psychology of consumer and firm behavior with behavioral economics 43 (3) 307-331

Levin, Irwin P. and Gary J. Gaeth (1988), “How Consumers Are Affected By The Framing Of Attribute Info,” Journal of Consumer Research, 15 (3), pg. 374

Baba, S, Julie A Edell Britton and John W Payne (2004), “Does Elaboration Increase or Decrease the Effectiveness of Negatively versus Positively Framed Messages,” Journal of Consumer Research, 31 (1), pg. 199.

Winer, R (1986) A Reference Price Model of Brand Choice for Frequently Purchased Products Journal of Consumer Research Vol. 13, No. 2 (Sep., 1986), pp. 250-256

Discussion Questions

1) What is your understanding of what framing effects are?

 2) Thinking of your own research, are there situations where you can see your research questions, or your data, subject to framing effects?

3) What does framing mean for the operation of markets? What does it mean for consumer welfare?

4) What is a reference price? Do consumers use them? How would you test this?

 

Week 10:  Temporal Issues

Consistency matters to the efficient operation of markets and inconsistency is often suggested as a source of consumer welfare problems, (failure to save for retirement, risky health behaviours, etc…). What does this research tell us about the effect of time on decisions?

Readings

Zauberman,Gal (2003), “The Intertemporal Dynamics of Consumer Lock-In,” Journal of Consumer Research, 30 (December), 405-419.

Hoffrage, U.;Hertwig, R.;Gigerenzer, G. (2000) Hindsight bias: A by-product of knowledge updating? Journal of Experimental Psychology: Learning, Memory, and Cognition, 26 (3), 566-581.

Della Vigna, S., and Malmendier, U., (2006) Paying not to go to the gym, The American economic review 96 (3) 694-719

Van den Bergh, B., Dewitte, S., & Warlop, L. (2008). Bikinis instigate generalized impatience in intertemporal choice. Journal of Consumer Research, 35, 85-97.

Discussion Questions

1) What effect does time have on consumers from a psychological perspective?

2) What does the Hindsight bias tell us about strategy research?

3) Why does the mechanism of the hindsight bias matter?

4) Could the idea of temporal discounting influence your own areas of research interest? How?


Week 11: Evolution and Markets

Evolutionary considerations have been applied to decision making in markets.

Readings

Lo, A., 2004, “The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective”, Journal of Portfolio Management 30, 15–29.

Kenrick, D., Giskevicius, V., Neuberg, S., (2012) “The financial consequences of too many men: Sex ratio effects on saving, borrowing, and spending.” Journal of Personality and Social Psychology, 102 (3), 550-561

Richardson, R. (1996) The prospects for an evolutionary psychology: Human language and human reasoning. Minds and Machines, Vol 6(4), Nov 1996, 541-557.

Confer, Jaime C.; Easton, Judith A.; Fleischman, Diana S.; Goetz, Cari D.; Lewis, David M. G.; Perilloux, Carin; Buss, David M. (2010) Evolutionary psychology: Controversies, questions, prospects, and limitations.American Psychologist, Vol 65(2), Feb-Mar 2010, 110-126.

Discussion Questions

1) What decision making assumptions underpin Lo’s view of markets?

2) How similar are the evolutionary papers read this week? How do they differ?

3) What impact do you think evolutionary thinking has made on business research? Can you explain its success or failure?

4) Do you think evolutionary decision making work is helped or hurt in gaining acceptance by the topics it seeks to explore?

5)  Thaler famously said that behavioural economics would be successful when it was just called economics. Will evolutionary psychology ever just be psychology?

6) Critics argue evolutionary psychology is not testable? Is this a valid criticism?

 Additional Reading

Buller, D., (2008) Four Fallacies of Pop Evolutionary Psychology, Scientific American, January 2009


Week 12: Applying Rationality

This week we tie things together by trying to formulate our own views of decision making, specifically what makes something rational.

Readings

Shafir, E., and Leboeuf, R., (2002) Rationality Annual Review of Psychology 53: 491-517

Smith, V., (2003) Constructivist and ecological rationality in economics, American economic review, 93 (3) 465-508

Gerd Gigerenzer, Henry Brighton (2009) Homo Heuristicus: Why Biased Minds Make Better Inferences Topics in Cognitive Science, Volume 1, Issue 1, pages 107–143, January 2009

Martie G. Haselton, Gregory A. Bryant, Andreas Wilke, David A. Frederick, Andrew Galperin, Willem E. Frankenhuis, and Tyler Moore (2009. Adaptive Rationality: An Evolutionary Perspective on Cognitive Bias. Social Cognition: Vol. 27, Special Issue: Rationality Restored

Discussion Questions

1) What do scholars mean when they say rational?

2) Is it possible to reconcile these approaches?

3) What approach makes the most sense in your discipline?

 Additional Reading

Shugan, S., (2006) Are consumers rational? Experimental evidence, Marketing science, 25 (1) 1-7

Follow up the Gigerenzer paper with:

Hilbig, B., and Richter, T., (2011) Homo heuristicus Outnumbered: Comment on Gigerenzer and Brighton (2009) Topics in Cognitive Science, Volume 3 Issue 1 pages 187–196, January

Brighton, H., and Gigerenzer, G., (2011) Towards Competitive Instead of Biased Testing of Heuristics: A Reply to Hilbig and Richter Topics in Cognitive Science, Volume 3 Issue 1 pages 197–205, January