Stefano DellaVigna
The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that
individuals deviate from the standard model in three respects: (i) non-standard preferences; (ii) non-standard beliefs; and (iii) non-standard decision-making. In this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from giving to labor supply. In the class of non-standard preferences, I discuss time preferences (self-control problems), risk preferences (reference dependence), and social preferences. On non-standard beliefs, I present evidence on overconfidence, on the law of small numbers, and on projection bias. Regarding non-standard decision-making, I cover limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors -- firms, employers, CEOs, investors, and politicians -- respond to the non-standard behavior described in the survey. I then summarize five common empirical methodologies used in Psychology and Economics. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the non-standard features.
2 comments:
This is a huge impressive paper- NBER 13430
The author notes that "a model of self-control problems with partial naivete can rationalize a number of findings that are puzzling to the standard exponential model". These are listed below. It is clear that people have a preference for commitment devices to off-load willpower demands. Recent models of time preferences focus on the extent to which people value future reward or the extent to which they draw the connection between their current behaviour and future consequences. Other factors include their level of self-control and the extent to which the behaviour has become habitual. However, there is little mention of insight into self-control problems as a determinant of behaviour.
The key to understanding why this is the case involves consideration of personal standards for self-regulation. Personal rules are based on the inferences people make about their own preferences based on their previous behaviour coupled with the behaviour of those around them.
Commitment devices allow us to reach our personal standards without suffering the costs of self-monitoring. For more on this see Willpower and Personal Rules
(i) excessive preference for
membership contracts in health clubs; (ii) positive effect of deadlines on homework grades and preference for deadlines; (iii) near-neglect of post-teaser interest rates in credit-card take-up;(iv) liquid debt and illiquid saving in life-cycle accumulation; (v) demand for illiquid savings as commitment devices; (vi) default effects in retirement savings and in other settings.
This does indeed look well worth a read. The author also has a paper on "job search and impatience" that I'm going to look at.
http://www.nber.org/papers/w10837
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