Transcript Slide 1

Sociality, Rationality, and the
Ecology of Choice
Daniel McFadden
University of California, Berkeley
May, 2009
Outline
• Sociality, Rationality, and Choice Behavior
– How Sociality Influences Economic Behavior
• Selected Literature
• A Classification of Effects
• Modeling Social Network Effects on Choice
– Constraints
– Information and Perceptions
– Preferences
• Altruism
• Norms, Accountability, Approval, Sanctions
• Experienced and remembered satisfaction
– Network-influenced decision-making
• Endogeneity in Network Affiliations and Network Effects
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Sociality
• Definition: The tendency to associate in or form social
groups and networks. The effect on human (economic)
behavior of affiliations with social networks; e.g.,
– Families
– Friends
– Neighbors
– Co-workers
– Teams
– Religious sects
– Tribal and ethnic groups
– Political parties
– Affinity/interest groups
• Membership in some social networks is by default; e.g.,
family, demographic and ethnic groups. Why do people
affiliate voluntarily with other social networks?
– Efficiencies in information collection and sharing
– Joint production and division of effort, risk-sharing
• Opportunity-based homophily (OBH) requires reciprocity
– Decision-making economies, approval, support, status
• Preference-based homophily (PBH) requires trust, altruism
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Reciprocity
• Often explained by enlightened self-interest
– Synchronous reciprocity is simple
– Asynchronous/multilateral reciprocity requires
reputation and trust
• Norms of reciprocity and fairness may evolve in social
networks through
– Accountability, approval, and sanctions
– Selection by recruitment, quits, and expulsions
– Group selection: networks with effective reciprocity
and fairness norms that make them more successful
are more likely to survive
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Altruism
• Preferences depend on the “satisfaction” of other network
members; e.g., through personal welfare functions of individualistic
felicities of oneself and others (Browning & Chiappori, 1998)
• Question: How do you know how satisfied others are?
– Self-reports may be unreliable: “Learn to complain without suffering.”
– Consumers may evaluate the felicity of others using their own tastes, and
their expectations regarding other’s circumstances
• One may use observed choices of others to infer status, satisfaction
• The hedonic treadmill may operate interpersonally as well as intrapersonally, with
changes in satisfaction weighing more heavily than status quo, strong aversion to
losses for oneself and others, and aversion to innovations that are “unfair”,
particularly but not exclusively to oneself
– Altruism is weaker toward people who when similarly situated behave
differently than oneself (Luttmer, 2001)
– Altruism is stronger toward people who demonstrate altruism to other
network members [multilateral reciprocity] (Tagiuri and Kogan, 1957)
• Altruism may be an internalization of reciprocity norms that solve
the repeated game of resource allocation within networks
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Sociality, Rationality, and Choice Behavior
• Limitations of neoclassical consumer theory
– Consumers meet in the marketplace, but are
individualistic and egocentric in their tastes and
beliefs. They are indifferent to the welfare of others,
and have sovereign preferences and expectations.
– A consumer never lets social interactions get under
her skin and directly touch her perceptions or
preferences. Rivalry in markets may be up-close, but
if it becomes personal, then one has to take it outside
(of classical economics).
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Market Interactions
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How Sociality Influences Economic Behavior
• Selected Literature
– Smith (1759) "Every man feels [after himself, the pleasures and
pains] of the members of his own family.”
– Edgeworth (1881) "... efforts and sacrifices ... are often
incurred for the sake of one’s family rather than oneself.”
– Veblen (1899) “human instincts of emulation, predation,
workmanship, parental bent, and idle curiosity [dictate
consumption behavior]”
– Dusenberry (1949); Schelling (1969,1971), Manski (1993),
Samuelson (2004) “…agents' decisions are guided by inferences
drawn from observations of others' decisions.”
– Banerjee (1992) “We often decide on what stores and
restaurants to patronize or what schools to attend on the basis
of how popular they seem to be.”
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Modeling the Effects of Sociality
– Brock & Durlauf (2001,2002) “The utility or payoff an
individual receives from a given action depends directly on the
choices of others in that individual's reference group [a field
effect], as opposed to the sort of dependence which occurs
through the intermediation of markets.”
– Dugundi & Walker (2004) “Interdependencies [across decisionmakers] are captured [through] choices of others [and]
correlation of disturbances”
– Myagkov et al (2007) Individuals are generally tolerant of the
risks of affiliating with social networks, including the risk of
rejection or expulsion, and the risk associated with the
productivity of group interactions
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How Sociality Influences Economic Behavior
• A Classification of Social Network Effects
– Constraints
– Information and Perceptions – OBH and field effects
– Preferences – PBH
• Altruism
• Norms, Accountability, Approval, Sanctions
• Experienced and remembered satisfaction
– Decision-making inside networks
• Emulation/Herd behavior – field effects
• Reciprocity
• Approval and reinforcement of remembered satisfaction
when choices are consistent with group norms – PBH 13
Constraints
• Neoclassical choice models can handle constraints
– Primary focus: budget constraint operating through market
prices and income
– Non-market externalities (e.g., congestion, social network
field effects) can be accounted for in rational preferences
– Some constraints may come from two-stage budgeting, with
the upper stage a bargaining game among network members
– Some constraints may come from obligations to social
networks
• Instrumental activities (e.g., travel) are part of
household & network production of personal benefits
• Exposure to constraints may be voluntary (e.g.,
choosing to travel to the beach on a crowded weekend)
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Perceptions
• Classical model: Consumers form and act on realistic,
rational expectations based on sound statistical analysis
of all available information
• Behavioral model: Memory is imperfect, personal
probability calculus is inconsistent
– First, last, and extreme occurrences, and coincidences, are
selectively remembered
– Small probabilities are either overestimated or ignored
– Analogies and exemplars (drawn from social networks) are
used in place of carefully calculated risk probabilities
– Risk perceptions are modulated by attention, and distorted by
systematic errors in subjective probability calculus
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Why am I so often stuck in the slower lane?
• Redelmeier and Tibshirani (1999):
– “We … videotaped traffic sequences by mounting a
camera in a moving vehicle and filming the side-view
perspective of the next lane on a congested road.
When a section of videotape showing a slightly slower
average speed in the next lane was screened to
driving students (n = 4120), 70% stated that the next
lane was moving faster and 65% said they would
change lane if possible.”
• What causes this common misperception?
– Psychophysical effects
– Extension effect: time rather than distance averaging
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Psychophysical effects
• An overtaken vehicle is quickly out of sight (and out of
mind), and an overtaking vehicle is a visible source of
irritation until it disappears ahead
• Losses from the “status quo” outweigh gains, and are
more memorable
• Slowly moving drivers may be more attentive to adjacent
lane activity
• Humans (and other animals) are more stressed by objects
moving toward them in their visual periphery than objects
moving away from them in their central vision
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All drivers are being
passed 58% of the time!
Blue
Lane
Red
Lane
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Network Information and Perceptions
• Networks collect and disseminate information on
attributes of choice alternatives (Banerjee, 1992;
Manski, 1993; Kohler, 1997; Brock & Durlauf, 2002)
• Contagion and non-unique equilibria are theoretically and empirically
likely
• To identify preference-based homophily (PBH) and contagion effects
(Manski’s reflection problem) requires observations on dynamics (with
an attendant “initial values” problem) or exogenous modulators of
contagion
– Importance of network information depends on
reliability/trust and content (share of first-adopters)
– PBH increases likelihood that network choice
patterns are predictive for one’s own satisfaction
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Ambiguity Aversion
Balls are red or black – you win if you pick red!
BOWL A
N = 10, R = 5
BOWL B
N = 10, R = ?
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Behavioral Consequences of “Irrational” Perceptions
• Resource allocation efficiency loss
– E.g., Drivers switch lanes too frequently
• Ex Post regret and mistrust of perceptions
– “Rational” aversion to ambiguity (Gilboa and
Schmeidler, 1989; Fosgerau & De Borger, 2008)
– Protective precommitments (e.g., “never a borrower or
a lender be”)
– Use network information to form, confirm perceptions
• Emulating network behavior limits ex post regret
– Stable response to moderate shocks, chaotic response
to large shocks (Aoki, 1996)
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Preferences
• Classical model: Consumers have utility based on their
individualistic outcomes, and are indifferent to the
welfare of others
• Behavioral model: Consumers have individualistic
felicities, but also have personal welfare functions that
may depend on
– (Indicators for) the felicities of others – altruism
– Comparisons with outcomes of others – status,
predation,
– Approval by others
– Accountability and sanctions
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Trust Game
• One-shot game, two anonymous players, no
communication allowed
– Experimenter gives 100 MU to Player 1 (Investor)
– Player 1 invests 0 ≤ x ≤ 100 with Player 2 (Trustee)
– The experimenter triples the investment so that
Trustee receives 3x in total
– Trustee gives 0 ≤ y ≤ 3x back to Investor, keeps 3x – y
• Rational play for individualistic players: Trustee returns y
= 0, therefore Investor invests x = 0
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Experimental Trust Game Results
Berg-Dickhaut-McCabe (1995)
• Results (for experienced players) –
• Average investment by Investor:
x = 56.1% of endowment (56.1 MU)
• Average return by Trustee:
y = 40.2% of augmented investment (67.6 MU)
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What are Investors Thinking?
• Suppose investors believe that all players have the same
CARA felicity function, u(c) = -exp(-δc)/δ, δ = 1, and that
trustees are of three possible types:
– Selfish /Rational: Trustee will return nothing
– Utility-maximizer: Trustee altruistically maximizes the
sum of (own felicity) + λ*(Investor felicity)
– Reciprocal: the Trustee will return the investment
and half of the extra income the investment
generates, or 2x
• Investor: max Ey {-exp(-1+x-y) - λ∙exp(y-3x)}
– If λ > 0, then the players are somewhat altruistic
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The McCabe data is explained by
• The Investor is altruistic to the degree λ = 0.22, and
believes that utility-maximizing Trustees have the same λ
• The Investor believes that the probabilities of trustees of
different types are
– Selfish
39.5%
– Utility-maximizer
0.0%
– Reciprocal
60.5%
• A model with altruism and reciprocity is underdetermined from this experiment, and the types and
probabilities above are not unique, but fit illustrates that
a mix of selfish, altruistic, and norm-driven behavior may
explain results in trust game and similar games
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Sociality and Rationality: Process
• Rationality – maximization of individualistic felicity subject
to applicable constraints
• Sociality – use analogies, exemplars, and heuristics
influenced by information from social networks, and
imitation and approval of social networks
• Consumers seem to be close to individualistic rationality
when stakes are high, but show influence of sociality when
stakes are modest and alternatives are unfamiliar
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Emulation as a Decision-Making Strategy
• Affiliation with social
networks, limiting choice
by accountability to
network norms, can be
an efficient decisionmaking strategy
• Competitors in bicycle
racing form a pellaton
that provides an energysaving, choice-limiting
environment – a model
for choice in networks?
Affiliation is voluntary, and
“breakaways” to form new
pellatons are common; e.g.,
network affiliations can be
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endogeneous
How Do Social Network Effects Influence Choice?
• Dugundji & Walker (2005) enter neighborhood and affinity
network effects in a mode choice model for Amsterdam
• Network effects may be due to
– Preferences of network members (unobserved PBH, treated
econometrically as a random effect)
– Network-communicated information (field effect)
– Supply-side/equilibrium constraints and conditions
• The authors find that both neighborhood and affinity
network field effects are significant, homophily effects do
not add significant explanation
• The study does not solve the reflection problem to
untangle PBH, field, and supply-side (OBH) sources of
network effects, or handle endogeneity
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Sorting out homophily, field, and equilibrium effects
• Affinity network effects most likely come from
PBH and field (information) factors
• Neighborhood network effects are likely to come
from OBH and supply-side constraints and
conditions
• Field and supply-side effects act through market
equilibrium, and are likely to be endogenous
when entered as explanatory factors in choice
models
• Voluntary affiliation may make network
membership endogenous
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Modeling endogenous network effects
• Notation: j = individual, k = network, j = 1,…,Nk
• Binomial (for example) choice:
djk = 1(Xjkβ + Ykγ + αk + εjk > 0),
• Network share sk = ∑j djk/Nk
– Xjk = mode attributes and individual characteristics
– Yk = network equilibrium (field and supply) effects
– αk = network PBH random effect
– β, γ parameter vectors
• ζk = g(sk,Zk,Yk) network equilibrium, Zk exogenous
– ε1k .... εJk and ζk are independent disturbances
– If no Zk, other restrictions are needed to solve the
reflection problem
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Consistent BLP (1995) Estimation (given Zk)
• Choice probability (logistic disturbance εjk)
Pjk = EαL(Xjkβ + Ykγ + αk)
1. Estimate model by MLE with network fixed effect
Pjk = L(Xjkβ + α*k)
2. Let αk = μ + ηk and estimate the linear model
α*k = Ykγ + μ + ηk
using Zk as instruments
• The method is consistent for β,γ, and moments of αk
when network affiliation is predetermined, but PBH
and/or contagion/field effects make network equilibria
endogenous
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Conclusions
• Sociality matters!
– Social network effects influence economic choice behavior
through constraints, perceptions, preferences, and the decisionmaking process, and their omission makes choice models
incomplete and misleading
• The rational choice model can be expanded to encompass
field, OBH, and PBH effects, and altruism
– Econometric analysis must account for equilibrium, endogeneity
of field effects, endogeneity of network affiliations
– Identification may require study of dynamics of field effects
• Reconciliation of rational choice models with reciprocity
and other social norms that make sense in the context of
repeated games, reputation, and evolution will require
deeper analysis of the dynamics of preferences and
strategies in repeated games
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