UEC-22306
Economics of Consumption,
Welfare & Society
Lecture #1 – Tuesday, March 17th 2020
Behavioral economic application to policy issues
Psychology, Behavioral Economics, and Public Policy (Amir et al., 2005)
Behavioral economics applied: Suggestions for policy making (Antonides,
2011)
------------------------------------------------------------------------------
-------------
NOTE: ik heb ook het eerste en tweede artikel van Amir et al. (2005) en Antonides (2011) hier in
verwerkt
Behavioral economics vs. Economic psychology
Behavioral economics
o Economists using insights from psychology
Economic psychology
o Psychologists using insights from economy
Different starting point, similar work
Trends in behavioral economics
1950 – 1975: satisficing and bounded rationality (Simon), consumer expectations:
optimism/pessimism (Katona)
1975 – 1995: heuristics and biases, decision making under risk (Kahneman, Tversky, Slovic,
Thaler)
Institutionalization: IAREP, SABE, Journal of Economic Psychology, Journal of Behavioral and
Experimental Economics, Journal of Behavioral Finance
1995 – now: applications in marketing, finance, law, policy
Thaler
Thaler received a Nobel prize for his limited rationality theory:
o Mental accounting
o Endowment effect
Social preferences:
o Fairness (people are not fully selfish)
Lack of self-control:
o Planner / doer model (long-term planning / short-term doing)
o Nudging
Nudging
Nudging is a part of behavioral economics
, A nudge alters people’s behavior in a certain desired direction without significantly changing
their economic incentives
Nudging changes the choice architecture
o Making small changes to the choices that are presented to make a certain choice
easier than the other
It enables people to make better choices and decisions
What is behavioral economics?
“... the combination of psychology and economics that investigates what happens in markets
in which some of the agents display human limitations and complications”
It improves the explanation of behavior by investigating differences with the standard
economic model:
o Bounded rationality
o Bounded willpower
o Bounded selfishness
Applications to policy
Problem:
o Reaching suboptimal outcomes & acting against own objectives
o “people often don’t know what’s best for themselves”
Idea of policy making:
o To help people make better decisions
Traditional classification policies
Behavioral economics and policy
Policy is traditionally based on economics, but not (or less) on psychology or behavioral
science
o “psychologists may play a larger role in public policy by helping economics develop
more valid assumptions and intuitions for the science that would underlie policy in
the future”
Behavorial economics makes it possible to develop a different kind of policy
Science vs. Policy?
A scientist can’t always deliver what the policy maker demands. There are two common
problems the scientist gives:
o “it depends”
Trade-off between accurate but vague answers that offer no clear
recommendations and inaccurate, yet precise answers resulting in a clear
policy
o “there is nothing more practical than a good theory”
Translating general theoretical principles into specific policies
o Simple stimuli and rich reality
Selecting stimuli that reflect the situation that they will be applied to
,Convincing policy makers
1. The first approach is the grassroots approach
o Starting at a local level instead of a national level
For example, start in your municipality and see if it is effective and will
spread
2. The second approach is to influence policy via economics
o Using established paths to inform policy makers - attempting to modify economics
to be more descriptively accurate, and from there influencing policy
The prospect theory is a prime example
3. A third approach involves influencing policy via law
o Using a different field as a bridge for existing gaps
4. The final and most challenging approach is doing research on policy
o Pilot testing of policy experiments
Policy instruments
Behavioral economics applied: Suggestions for policy making (Antonides,
2011)
Five types of policy instruments:
1. Teaching
2. Learning
3. Communication
4. Changing the choice context (choice architecture)
5. Rules and laws
Policy instruments
1. Teaching
Teaching implies educating people in decision-making skills
o Finding information, weighting alternatives
Making people aware of possible heuristics, biases and motivations
o Analogical reasoning, taking outsider’s view, statistical decision aids, understanding
biases
Problems: requires motivation, can be counterproductive
Policy instruments
2. Learning
Conditioning
o Incentives (e.g. lower taxes, subsidies)
Social learning (e.g. imitation, role models)
Insight learning (e.g. reasoning, creativity)
Problems: limited or costly learning opportunities, wrong type of feedback (e.g. short term),
crowding out intrinsic motivation (e.g. blood donations -> if you’d reward people with
money, they would donate blood for money and not for a good cause)
Policy instruments
3. Communicating
Changing cognitive or affective determinants of behavior (e.g. by using role models)
Focusing on target behavior (e.g. agenda setting)
, Universities for example can tell their students that the majority drinks less, thus reducing
undesirable behavior
Problems: needs attention (if people don’t notice your campaign you need to undertake
action) and information processing
Policy instruments
4. Changing the choice context
Using heuristics and biases to the advantage of decision makers
o Choice architecture
Problem: opposite interests (between consumers and companies)
Policy instruments
5. Rules and laws
Limiting, prohibiting, reducing undesired behavior or circumstances (e.g. smoking ban)
Facilitating, increasing desired behavior of circumstances (e.g. saving and tax incentives)
Problems: restricted freedom, inequity, paternalism, costs, maintenance
Lecture #2 – Thursday March 19th 2020
Happiness and well-being
------------------------------------------------------------------------------
-------------
Utility
Utility is the satisfaction one receives from an (economic) act
o Utility is immeasurable
o Utility is related to your income
Wide range of definitions and nuances
Happiness: momentary feeling of joy and pleasure
o In psychology it is seen as positive and negative effects
Satisfaction of life: overall contentment with life
Wellbeing: the state of being comfortable, healthy or happy
Welfare: the health, happiness and fortunes of a person or group
Measurement
How can happiness be measured?
o By observation (objective)
The degree a life meets explicit standards of the good life as assessed by an
impartial outsider
Psychological and physical (stress levels, smiling)
o By questioning (subjective)
Self-appraisals based on implicit criteria
Ask people on a scale from 1 to 10 how satisfied they are with their life
Subjective well-being
Subjective well-being is about:
Economics of Consumption,
Welfare & Society
Lecture #1 – Tuesday, March 17th 2020
Behavioral economic application to policy issues
Psychology, Behavioral Economics, and Public Policy (Amir et al., 2005)
Behavioral economics applied: Suggestions for policy making (Antonides,
2011)
------------------------------------------------------------------------------
-------------
NOTE: ik heb ook het eerste en tweede artikel van Amir et al. (2005) en Antonides (2011) hier in
verwerkt
Behavioral economics vs. Economic psychology
Behavioral economics
o Economists using insights from psychology
Economic psychology
o Psychologists using insights from economy
Different starting point, similar work
Trends in behavioral economics
1950 – 1975: satisficing and bounded rationality (Simon), consumer expectations:
optimism/pessimism (Katona)
1975 – 1995: heuristics and biases, decision making under risk (Kahneman, Tversky, Slovic,
Thaler)
Institutionalization: IAREP, SABE, Journal of Economic Psychology, Journal of Behavioral and
Experimental Economics, Journal of Behavioral Finance
1995 – now: applications in marketing, finance, law, policy
Thaler
Thaler received a Nobel prize for his limited rationality theory:
o Mental accounting
o Endowment effect
Social preferences:
o Fairness (people are not fully selfish)
Lack of self-control:
o Planner / doer model (long-term planning / short-term doing)
o Nudging
Nudging
Nudging is a part of behavioral economics
, A nudge alters people’s behavior in a certain desired direction without significantly changing
their economic incentives
Nudging changes the choice architecture
o Making small changes to the choices that are presented to make a certain choice
easier than the other
It enables people to make better choices and decisions
What is behavioral economics?
“... the combination of psychology and economics that investigates what happens in markets
in which some of the agents display human limitations and complications”
It improves the explanation of behavior by investigating differences with the standard
economic model:
o Bounded rationality
o Bounded willpower
o Bounded selfishness
Applications to policy
Problem:
o Reaching suboptimal outcomes & acting against own objectives
o “people often don’t know what’s best for themselves”
Idea of policy making:
o To help people make better decisions
Traditional classification policies
Behavioral economics and policy
Policy is traditionally based on economics, but not (or less) on psychology or behavioral
science
o “psychologists may play a larger role in public policy by helping economics develop
more valid assumptions and intuitions for the science that would underlie policy in
the future”
Behavorial economics makes it possible to develop a different kind of policy
Science vs. Policy?
A scientist can’t always deliver what the policy maker demands. There are two common
problems the scientist gives:
o “it depends”
Trade-off between accurate but vague answers that offer no clear
recommendations and inaccurate, yet precise answers resulting in a clear
policy
o “there is nothing more practical than a good theory”
Translating general theoretical principles into specific policies
o Simple stimuli and rich reality
Selecting stimuli that reflect the situation that they will be applied to
,Convincing policy makers
1. The first approach is the grassroots approach
o Starting at a local level instead of a national level
For example, start in your municipality and see if it is effective and will
spread
2. The second approach is to influence policy via economics
o Using established paths to inform policy makers - attempting to modify economics
to be more descriptively accurate, and from there influencing policy
The prospect theory is a prime example
3. A third approach involves influencing policy via law
o Using a different field as a bridge for existing gaps
4. The final and most challenging approach is doing research on policy
o Pilot testing of policy experiments
Policy instruments
Behavioral economics applied: Suggestions for policy making (Antonides,
2011)
Five types of policy instruments:
1. Teaching
2. Learning
3. Communication
4. Changing the choice context (choice architecture)
5. Rules and laws
Policy instruments
1. Teaching
Teaching implies educating people in decision-making skills
o Finding information, weighting alternatives
Making people aware of possible heuristics, biases and motivations
o Analogical reasoning, taking outsider’s view, statistical decision aids, understanding
biases
Problems: requires motivation, can be counterproductive
Policy instruments
2. Learning
Conditioning
o Incentives (e.g. lower taxes, subsidies)
Social learning (e.g. imitation, role models)
Insight learning (e.g. reasoning, creativity)
Problems: limited or costly learning opportunities, wrong type of feedback (e.g. short term),
crowding out intrinsic motivation (e.g. blood donations -> if you’d reward people with
money, they would donate blood for money and not for a good cause)
Policy instruments
3. Communicating
Changing cognitive or affective determinants of behavior (e.g. by using role models)
Focusing on target behavior (e.g. agenda setting)
, Universities for example can tell their students that the majority drinks less, thus reducing
undesirable behavior
Problems: needs attention (if people don’t notice your campaign you need to undertake
action) and information processing
Policy instruments
4. Changing the choice context
Using heuristics and biases to the advantage of decision makers
o Choice architecture
Problem: opposite interests (between consumers and companies)
Policy instruments
5. Rules and laws
Limiting, prohibiting, reducing undesired behavior or circumstances (e.g. smoking ban)
Facilitating, increasing desired behavior of circumstances (e.g. saving and tax incentives)
Problems: restricted freedom, inequity, paternalism, costs, maintenance
Lecture #2 – Thursday March 19th 2020
Happiness and well-being
------------------------------------------------------------------------------
-------------
Utility
Utility is the satisfaction one receives from an (economic) act
o Utility is immeasurable
o Utility is related to your income
Wide range of definitions and nuances
Happiness: momentary feeling of joy and pleasure
o In psychology it is seen as positive and negative effects
Satisfaction of life: overall contentment with life
Wellbeing: the state of being comfortable, healthy or happy
Welfare: the health, happiness and fortunes of a person or group
Measurement
How can happiness be measured?
o By observation (objective)
The degree a life meets explicit standards of the good life as assessed by an
impartial outsider
Psychological and physical (stress levels, smiling)
o By questioning (subjective)
Self-appraisals based on implicit criteria
Ask people on a scale from 1 to 10 how satisfied they are with their life
Subjective well-being
Subjective well-being is about:
