Transcript Affective Economics - Stanford University

Animal Spirits
Affective and Deliberative
Processes in Economic
Behavior
George Loewenstein & Ted O’Donoghue
Ed Lazear, "Economic Imperialism"
Economic Journal,2000.
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law
political science
history
Demography
…..
"individuals engage in
maximizing rational
behavior"
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spending/saving
insurance
labor market behavior
bargaining
investing
medical decision making
gambling
criminal behavior
fertility/sex
charity/altruism
dieting
addiction
suicide
The craving for power which characterizes the governing class in every
nation is hostile to any limitation of the national sovereignty. This
political power hunger is often supported by the activities of another
group, whose aspirations are on purely mercenary, economic lines…
Letter from Albert Einstein to Sigmund Freud (1932)
The craving for power which characterizes the governing class in every
nation is hostile to any limitation of the national sovereignty. This
political power hunger is often supported by the activities of another
group, whose aspirations are on purely mercenary, economic lines…
How is it that these devices succeed so well in rousing men to such
wild enthusiasm, even to sacrifice their lives? Only one answer is
possible.
Letter from Albert Einstein to Sigmund Freud
The craving for power which characterizes the governing class in every
nation is hostile to any limitation of the national sovereignty. This
political power hunger is often supported by the activities of another
group, whose aspirations are on purely mercenary, economic lines…
How is it that these devices succeed so well in rousing men to such
wild enthusiasm, even to sacrifice their lives? Only one answer is
possible. Because man has within him a lust for hatred and
destruction. In normal times this passion exists in a latent state, it
emerges only in unusual circumstances; but it is a comparatively
easy task to call it into play and raise it to the power of a collective
psychosis. Here lies, perhaps, the crux of all the complex factors
we are considering, an enigma that only the expert in the lore of
human instincts can resolve.
Letter from Albert Einstein to Sigmund Freud
The craving for power which characterizes the governing class in every nation
is hostile to any limitation of the national sovereignty. This political power
hunger is often supported by the activities of another group, whose aspirations
are on purely mercenary, economic lines…
How is it that these devices succeed so well in rousing men to such wild
enthusiasm, even to sacrifice their lives? Only one answer is possible.
Because man has within him a lust for hatred and destruction. In normal
times this passion exists in a latent state, it emerges only in unusual
circumstances; but it is a comparatively easy task to call it into play and
raise it to the power of a collective psychosis. Here lies, perhaps, the crux
of all the complex factors we are considering, an enigma that only the
expert in the lore of human instincts can resolve.
Letter from Albert Einstein to Sigmund Freud
Freud’s response: “You have stated the gist of the matter in
your letter--and taken the wind out of my sails!
And, another expert’s opinion…
“Arguments must be crude, clear and
forcible and appeal to emotions and
instincts, not the intellect. Truth was
unimportant and entirely subordinate to
tactics and psychology.”
Hermann Goering
Affect is also important in every-day economic
activity..
• Advertising (that conveys no evident information)
• Gambling (especially by people who also buy
insurance)
• Taking (and avoiding) the wrong risks
• Helping the wrong victims
• Non-self-interested political preferences – e.g.,
why poor people support tax cuts for the rich
• Failure to reach agreement in negotiations –
e.g.,nasty divorces
• Self-control problems – e.g., dieting, drug
addiction, crimes of passion, failure to practice
safe sex, etc..
Affect once an integral part of
economics (going by the label, ‘the
passions.’)
"When we are about to act, the eagerness
of passion will seldom allow us to consider
what we are doing with the candour of an
indifferent person.
This.. fatal weakness of mankind is the
source of half the disorders of human life.
Theory of Moral Sentiments
Adam Smith
Smith’s specific perspective (close to many
contemporary ‘dual process’ models in psychology)
Indulge!
Would an
honorable man do
it?
passions
“impartial
spectator”
• Neoclassical economists aware of importance of affect:
Human behavior, in general, and presumably, therefore, also in
the market place, is not under the constant and detailed guidance
of careful and accurate hedonic calculations, but is the product of
an unstable and unrational complex of reflex actions, impulses,
instincts, habits, customs, fashions and mob hysteria. In light of
modern psychology "let reason be your guide" is apparently a
counsel of unapproachable perfection.
Jacob Viner, 1925
• but deterred from incorporating it into economics due to
its perceived complexity, as well as problem that affect
could not be measured directly
“I hesitate to say that men will ever have the means of measuring
directly the feelings of the human heart. It is from the quantitative
effects of the feelings that we must estimate their comparative
amounts.”
W.S. Jevons, 1871
A century later, we know a lot more about affect..
Neuroscience methods:
• Human
– brain lesions, accidents, &
lobotomies
– Brain imaging
• Animal
– Electrical brain stimulation
– Single-neuron measurement
And economists have started to
propose formal models of affect
Recent dual process models in economics:
• Thaler & Shefrin, 1981
• Bernheim & Rangel, 2005
• Benhabib & Bisin, 2002
• Fudenberg & Levine, 2004
My research (three thrusts):
Empirical:
•
Affect has the capacity to turn us into virtually different
people -- including on the dimensions that economists
care most about
•
People lack empathy for their own and others’
emotional states: “hot-cold empathy gaps”
 Long-term decision-making is powerfully influenced in a
non-normative fashion by transient emotional factors:
‘projection bias’ (Loewenstein, O’Donoghue & Rabin,
QJE, 2003)
Theoretical:
Model of affect/deliberation interactions
Sadness Reverses the endowment effect
$5.00
$4.00
$3.00
$2.00
$1.00
Choose
Sell
$0.00
Sadness
Neutral
Lerner, J. S., Small, D. A., and Loewenstein, G. (2004). Heart
strings and purse strings: Carry-over effects of emotions on
economic transactions. Psychological Science, 15(5), 337-41.
Disgust
Life for the emotional is very different,
comprised of dizzying revolutions of the
clock, for what they want changes so
rapidly that who they are is constantly in
question… If I went to bed one night
loving Chloe are awoke the next
morning hating her, then who was “I”?
Alain de Botton, On Love
My research (three thrusts):
Empirical:
•
Affect has the capacity to turn us into virtually different
people -- including on the dimensions that economists
care most about
•
People lack empathy for their own and others’
emotional states: “hot-cold empathy gaps”
 Long-term decision-making is powerfully influenced in a
non-normative fashion by transient emotional factors:
‘projection bias’ (Loewenstein, O’Donoghue & Rabin,
QJE, 2003)
Theoretical:
Model of affect/deliberation interactions
Hot-cold empathy gaps
Drug Craving
Louis Giordano, Warren K. Bickel, Eric A. Jacobs, George Loewenstein, Lisa Marsch,
and Gary J. Badger.
Procedure (simplified):
• n=13 addicts receiving Buprenorphin (BUP)
(methadone-like maintenance drug)
• chose between extra dose of BUP or different
money amounts, either to be received 5 days later
• Made choice either right before receiving BUP (i.e.,
when deprived) or right after (when satiated)
Prediction: Addicts will value delayed BUP more highly if
choosing when they are currently craving than when they
are not currently craving
Results
Median monetary amount preferred to an extra
dose of buprenorphine
60
50
40
$s
30
20
10
0
deprived (before
getting dose)
not deprived (after
getting dose)
“The only trouble was the heat. The heat was
tremendous and nowhere in Rome was hotter
than Laura's apartment. She had been so
eager to get back into her own place that she
had forgotten how hot it would be. Heat is like
that. In the course of winter unbearable heat
cools in memory and becomes attractive,
desirable. Now it was terribly hot.”
Geoff Dyer (1997). Out of Sheer
Rage.
My research (three thrusts):
Empirical:
•
Affect has the capacity to turn us into virtually different
people -- including on the dimensions that economists
care most about
•
People lack empathy for their own and others’
emotional states: “hot-cold empathy gaps”
 Long-term decision-making is powerfully influenced in a
non-normative fashion by transient emotional factors:
‘projection bias’ (Loewenstein, O’Donoghue & Rabin,
QJE, 2003)
Theoretical:
Model of affect/deliberation interactions
It is always thus, impelled by a state of
mind which is destined not to last, that
we make our irrevocable decisions.
Marcel Proust, Remembrance of Things Past
My research (three thrusts):
Empirical:
•
Affect has the capacity to turn us into virtually different
people -- including on the dimensions that economists
care most about
•
People lack empathy for their own and others’
emotional states: “hot-cold empathy gaps”
 Long-term decision-making is powerfully influenced in a
non-normative fashion by transient emotional factors:
‘projection bias’ (Loewenstein, O’Donoghue & Rabin,
QJE, 2003)
Theoretical:
Model of affect/deliberation interactions
Central insight: Affect is important,
but humans also have the ability to
deliberate systematically about the
consequences of their decisions
 Model needs to incorporate
interaction of affect and deliberation
Goal of paper:
To formally model the role played by affect in
human behavior and to trace out
implications for economics – specifically:
• Intertemporal choice
• Decision under risk and uncertainty
• Interpersonal decision-making (e.g.,
bargaining, charity, etc.)
Schematic representation of our
model
Schematic representation of our
model
Proximity
(e.g., Mischel et al.; VanBoven et al.)
Schematic representation of our
model
Schematic representation of our
model
Schematic representation of our
model
?
Some notation:
•x
•s
•a(s)
•c(s)
consumption
stimuli
affective states induced by stimuli
cognitive states induced by stimuli
Affective optimum (M stands for ‘motivation’):
x A  arg max xX M ( x, a)
Deliberative optimum:
x D  argmaxxX U ( x, c, a)
Proximity: important source of xD ≠ xA
Utility cost of x ≠ xA:
h(W,σ)*[M(xA,a)–M(x,a)]
where,
W willpower
σ
factors that weaken or bolster deliberative system -- e.g., stress &
cognitive load
h(.) cost of willpower


V ( x, s)  U ( x, c(s), a(s))  h(W , ) * M ( x A , a(s))  M ( x, a(s))
Generates behavior somewhere in between the deliberative optimum
and the affective optimum, depending on relative strength of the two
systems as captured by the cost of willpower h(W, σ)
h(W,σ)=0
deliberative system in complete control
h(W,σ)=∞
affective system in complete control
General modeling strategy:
•Assume that U function is well-described by normative
models (e.g., expected value, discounted utility,
utilitarianism)
•Adapt assumptions about the M function from psychology
research
Ability to exert willpower also depends on prior
exertions of willpower (Baumeister et al., 19992004).
willpower dynamics:
wt ≡M(xtA,at)–M(xt,at)
willpower exerted at time t
Wt+1 = f(wt,Wt)
with f declining in w
Three applications
• Intertemporal Choice
• Risk
• Social preferences
Intertemporal Choice
Assume:
• deliberative system cares equally about
all outcomes
• affective system completely myopic
intertemporal choice
Neural underpinnings of intertemporal choice
Free
2s
McClure, S.M., Laibson, D.I., Loewenstein, G.and Cohen, J.D.
(2004). Separate neural systems value immediate and
delayed monetary rewards. Science, 304, 503-507
12 s
A
MPFC
PCC
VStr
MOFC
10
T13
0
x = 4mm
% Signal Change
B
y = 8mm
VStr
0.4
MOFC
MPFC
PCC
0.2
0.0
-0.2
-4
0
4
Time (s)
8
d = Today
Figure 1
z = -4mm
d = 2 weeks
d = 1 month
A
B
VCtx
1.2
PMA
RPar
DLPFC
VLPFC
LOFC
d = Today
d = 2 weeks
LOFC
x = 44mm
0.8
0.4
0.0
-4
PMA
VCtx
% Signal Change
DLPFC
RPar
0
4
Time (s)
8
SMA
x = 0mm
0
Figure 2
T13
10
d = 1 month
A
B
75%
RT (s)
P(choose early)
100%
50%
4.0
3.5
3.0
25%
0%
1-3%
5-25%
2.5
35-50%
R’ vs. R
C 1.2
% Signal Change
4.5
VCtx
Easy
Difficult
Decision
PMA
RPar
VLPFC
LOFC
0.8
0.4
0.0
-4
0
4
Time (s)
DLPFC
8
Difficult
Easy
Figure 3
Normalized Signal Change
0.05
d areas
0.0
b areas
-0.05
Choose
Early
Figure 4
Choose
Late
Intertemporal choice conclusions
• hyperbolic time preference results from affective
response to immediate outcomes
• hyperbolic time preferences & temptation
preferences extreme special cases of our model
(reality probably lies in-between)
• model generates novel prediction that time
preference will vary over time in response to:
– willpower depletion
– cognitive load
– proximity of temptations
Shiv, B. and Fedorikhin, A. (1999), "Heart and
Mind in Conflict: Interplay of Affect and Cognition
in Consumer Decision Making," Journal of Consumer
Research, Vol. 26 (December), 278-282.
• Cognitive/deliberative mental processing
resources manipulated by having people keep
a 2-digit or 7-digit number in mind as they walk
from one room to another
• On the way, subjects face choice between
piece of cake or fruit-salad
Processing resources
High (2 digit #)
Low (7 digit #)
% choosing cake
37%
59%
Risk
•Many examples of divergences between affective
and deliberative evaluations of risks – e.g., flying
versus driving
•Shiv, B., Loewenstein, G., Bechara, A., Damasio, H., and Damasio, A. (2005),
“Investment Behavior and the Dark Side of Emotion,” Psychological Science.
Illustrates the (potentially negative) influence of affect on risky decisionmaking
• Subjects: 15 patients with lesions in regions critical for emotional
processing (amygdala, orbitofrontal, and insular/somatosensory
cortex); 15 normal controls, & 7 patient controls with lesions in brain
regions not associated with emotional processing
• Procedure:
– Begin with $20; play 20 rounds of gambling task
– Each round: Can put $1 at risk: 50/50 chance of losing the $1 or
getting $2.50 (e.v. of gambling is $1.25)
Results: % gambling
90%
80%
70%
85.3%
82.7%
81.3%
85.3%
80.00%
73.0%
60%
62.90%
56.0%
61.3%
50%
54.30%
57.3%
45.70%
40%
30%
20%
10%
0%
1st 5
Target Patients
2nd 5
3rd 5
Normals
4th 5
Patient-controls
Normals responded to both winning and losing
by subsequently not gambling
Percent gambling conditional on action and outcome of prior round
Action/
outcome
(a)
emotion
deficit
Patients
(b)
normal
controls
(c)
patient
controls
significance of
difference
didn't invest
74.2%
70.2%
63.4%
n.s.
invested
and won
84.0%
61.4%
75%
p<.02 (a vs. b)
p<.16 (a vs. c)
invested
and lost
85.2%
46.9%
37.1%
p<.005 (a vs. b)
p<.006 (a vs. c)
earnings
$25.70
$23.40
$20.07
p<.11
p<.006
Modeling risky decision-making
Assume:
•Deliberative system: EV
•Affective system: Weights all possible outcomes equally
  ( x1 , p1;...; xN , pN )
[ p1 x1  ...  pN xN ]  h *[(x  ...  x )  ( x1  ...  xN )]
A
1
A
M
 pN  h 
 p1  h 
 * xN

 * x1  ...  
 1  Nh 
 1  Nh 
• (p+h)/(1+Nh) > p for p < 1/N and (p+h)/(1+Nh) < p for p > 1/N)
 s-shaped probability weighting: small probabilities overweighted; large
probabilities underweighted
 Probability weighting more s-shaped for affective outcomes than for nonaffective outcomes (Hsee & Rottenstreich,2003; Ditto, Epstein & Pizarro,
forthcoming)
 Acting on one’s cognitive appraisals of, as opposed to reflexively
responding to emotional reactions to, risks, can require willpower
Altruism
Adam Smith:
Let us suppose that the great empire of China, with all its myriads of inhabitants, was
suddenly swallowed up by an earthquake, and let us consider how a man of humanity in
Europe, who had no sort of connection with that part of the world, would be affected upon
receiving intelligence of this dreadful calamity. He would, I imagine, first of all express
very strongly his sorrow for the misfortune of that unhappy people, he would make many
melancholy reflections upon the precariousness of human life, and the vanity of all the
labours of man, which could thus be annihilated in a moment… And when all this fine
philosophy was over, when all these humane sentiments had been once fairly expressed,
he would pursue his business or his pleasure, take his repose or his diversion, with the
same ease and tranquility as if no such accident had happened. The most frivolous
disaster which could befall himself would occasion a more real disturbance. If he was to
lose his little finger tomorrow, he would not sleep to-night; but, provided he never saw
them, he will snore with the most profound security over the ruin of a hundred millions of
his brethren..
Why, then do people often behave humanely toward others they don’t know?
Smith’s answer:
“reason, principle, conscience, the inhabitant of the breast, the man within, the
great judge and arbiter of our conduct” – i.e., the impartial spectator
We model altuism by assuming:
• deliberative system evaluates outcomes
based on utilitarianism with an extra
weight on self
• affective system can deviate from that rule
in either direction
• ↓willpower(e.g., due to stress or load)
shift toward affective optimum
Identifiability and altruism
(study with Deborah Small)
• Created “Victims” by first endowing each member of a
group with $10 and then randomly selected half to lose
their endowment.
• Each person who kept their $10 could contribute a
portion of it to a ‘victim’ who had lost his or hers.
• Identifiability manipulated by drawing number of the
recipient before/after making helping decision.
Results
N
Mean
amount given
Median
amount
given
37
$2.12
$1.81
39
$3.42
$3.81
Condition
Undetermined
(Draw # after)
Determined
(Draw # before)
Additional studies:
•Replicate effect in field (donations to Habitat for Humanity)
•Show effect is mediate by differential affective reactions
•Document analogous effect for punitiveness – greater toward
identifiable perpetrators
•Examine effect of learning about the effect
Learning about Identifiability
(Deborah Small, with me and Paul Slovic)
Statistical victims
• Automobile fatalities
• Organ donation
waitlist
• Victims of war
• Risk prevention
Identifiable victims
Possible?
Identifiable victims
Statistical victims
• Automobile fatalities
• Organ donation
waitlist
• Victims of war
• Risk prevention
Caring
Statistical victim
– Food shortages in Malawi are affecting more than
3 million children.
– More than 11 million people in Ethiopia need
immediate food assistance.
– In Zambia, severe rainfall deficits have resulted in
a 42 percent drop in maize production from 2000.
As a result, an estimated 3 million Zambians face
hunger.
• Four million Angolans -- one third of the population -have been forced to flee their homes.
Identifiable victim
Meet Rokia, a 7-year-old girl
from Mali, Africa.
Method
• 2 (stat./ident.) X 2 (Teach/no teach)
between subjects design
• 119 participants filled out (unrelated)
survey for $5
• ‘Save the Children’ charity request
• Ecologically-valid presentation
Teaching identifiability
“First, before we ask you to decide about
how much, if any, of your earnings to
donate, we'd like to tell you about some
research conducted by social scientists.
This research shows that people typically
react more strongly to specific people who
have problems than to statistics about
people with problems….”
Mean Donation
$3.00
$2.50
$2.00
$1.50
No Teach
$1.00
Teach
$0.50
$0.00
Statistical
Identifiable
Priming affect versus deliberation
• N= 146 people on university campus received 5
dollar bills for participating
• Affective versus deliberative decision making
manipulated (Hsee & Rottenstreich, 2004)
– Half first asked a series of questions that involved
calculations – e.g., “If an object travels at five feet per
minute, then how many feet will it travel in 360
seconds?
– Half asked series of questions that involved feelings –
e.g., “When you hear the name “George W. Bush,”
what do you feel?”
• Given opportunity to donate part or all of $5 to either
an identifiable victim or statistical victims
$3
$2
$2
Calculate
Feel
$1
$1
$0
statistical
identifiable
$3
$2
$2
Calculate
Feel
$1
$1
$0
statistical
identifiable
Identifiable victims
Statistical victims
• Automobile fatalities
• Organ donation
waitlist
• Victims of war
• Risk prevention
Caring
L’Intransigeant, 1922
Marcel Proust’s response:
“An American scientist
announces that the
world will end… If this
prediction were
confirmed, what do you
think would be its
effects on people
between the time when
they acquired the
aforementioned
certainty and the
moment of cataclysm?“
“I think that life would suddenly seem
wonderful to us if we were threatened to
die. Just think of how many projects,
travels, love affairs, studies, it – our life
– hides from us, made invisible by our
laziness which, certainty of a future,
delays incessantly.
But let all this threaten to become
impossible for ever, how beautiful it
would become again! …
The cataclysm doesn’t happen, we don’t do
any of it, because we find ourselves
back in the heart of normal life, where
negligence deadens desire. And yet we
shouldn’t have needed the cataclysm to
live life today. It should have been
enough to think that we are humans,
and that death may come this evening.”