Abstract
In the previous chapters we discussed introductory consumer, producer, and game theory. There, consumers and producers are assumed to be perfectly rational, meaning that they act to achieve a goal given their constraints. In particular, consumers obtain the most beneficial combination of products that they can afford, and firms produce the amount of their product that gives them the highest profit based on consumer demand, technological conditions, and rival behavior.
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- 1.
There are others who believe that after a run of heads, a tails is “due,” and that the next flip will likely be tails. In either case, people mispredict the probability of a head on the next flip.
- 2.
The inclusion of psychological and neuroscientific evidence (discussed below) in the field of economics has been highly controversial (Caplin and Schotter 2008, for example). At one extreme is the argument that psychology and neuroscience do not add anything to, and cannot improve on, economics. At the other extreme, traditional economics is indicted as replete with unexplained anomalies. We take neither extreme position and view behavioral and neuroscientific knowledge as information that is used to augment and extend introductory economic models.
- 3.
- 4.
Neuroscience is the branch of science concerned with the nervous system. The Merriam–Webster Medical Dictionary (2010) defines neuroscience as “a branch (as neurophysiology) of science that deals with the anatomy, physiology, biochemistry, or molecular biology of nerves and nervous tissue and especially their relation to behavior and learning.” Neurophysiology is defined as “physiology of the nervous system.”
- 5.
The topic of information is also discussed in Chap. 3.
- 6.
Other authors characterize dual systems including: automatic versus controlled (Lowenstein et al. 2008), affective versus deliberative (Lowenstein and O’Donoghue 2005), visceral versus cognitive (McFadden 2006), hot versus cold (Bernheim and Rangel, 2004), and simply System 1 and System 2 (Stanovich and West 2000). Camerer et al. (2005) break down mental processes further into four groupings. Controlled processes correspond to Kahneman’s reasoning, and automatic processes represent Intuition. Each is further divided into Cognitive and Affective processes to yield controlled-cognitive, controlled-affective, automatic-cognitive and automatic-affective.
- 7.
More specifically, Stone statistically estimates how voters should revise their ranks and finds that voters tend to be unresponsive to less salient information (such as margin of victory, home status) relative to statistical benchmarks. Voters responded appropriately to information about the most salient information about a game result, win or loss information. Technically, Stone evaluates whether voter choices are consistent with estimated Bayesian updating.
- 8.
Glaeser’s paper applies more broadly than to just firms and marketing practices. For instance, political influence is a major theme in his work. This discussion does not include his entire set of implications.
- 9.
Another reason for maintaining the status quo is the presence of switching costs.
- 10.
A neuroeconomic study by van Veen et al. (2009) supports the theory of cognitive dissonance.
- 11.
Reference dependence and loss aversion are modeled by Prospect Theory, also discussed in Kahneman et al. (1991) and Tversky and Kahneman (1992).
- 12.
The corresponding neuroscience experiment scanned the brains of the subjects while they were making these decisions. The fMRI scans supported the presence of individual differences in the endowment effect.
- 13.
For a clear, concise summary integrating economic, psychological, and neuroscientific contributions, see Berns et al. (2007).
- 14.
Purchasing by habit might also be explained by bounded rationality as a way of dealing with imperfect and incomplete information.
- 15.
Although the hyperbolic function specifies that \( 0 \,<\, \beta \leq 1,\,\, 0 \,<\, D \leq 1 \), in practice, it is usually assumed that \( 0 \,<\, \beta \,<\, 1,\;\;0 \,<\, D \,<\, 1 \).
- 16.
Angeletos et al. (2001). Another discount function that allows for time inconsistency is the hyperbolic: \( \left( \tau \right) = \frac{1}{{{{(1 + {\alpha} \tau )}^{{\frac{{ - {\gamma}}}{{\alpha} }}}}}}, \) \( {\alpha}, {\gamma}\ > \ \rm 0 \).
- 17.
Pavlov conducted experiments on dogs, in which various stimuli (sound, visual, and tactile) were applied when the dogs were eating food. After the dogs were “conditioned” to expect food with a stimulus, Pavlov found that the stimulus would cause the dogs to salivate even when they did not consume food (http://www.ivanpavlov.com, 2003).
- 18.
Interestingly, the chemical composition and patent numbers of Secret and Sure deodorants are identical. http://www.killianadvertising.com/wp16.html. Although Sure Original is a gender-neutral product, the company introduced “Sure for Men” and “Sure for Women” on February 16, 2010 (http://www.suredeodorant.com/), accessed March 4, 2011.
- 19.
For a discussion of the effect of culture and identity on beer demand, see McCluskey and Shreay (2011).
- 20.
See Chap. 14 for more information about blind taste tests.
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Tremblay, V.J., Tremblay, C.H. (2012). Behavioral Economics. In: New Perspectives on Industrial Organization. Springer Texts in Business and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-3241-8_4
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