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December 22, 2012 / compassioninpolitics

Behavioral Economics and Neuroeconomics Principles for Social Entrepreneurs

1) Satisficing vs. Optimizing
2) Representativeness Heuristic
3) Availability Bias

Other less so:
1) Peak-end rule
2) Optimism Bias
3) Prospect theory

First-impression bias (priming & framing & rapport & credibility)

Four Areas:
The four areas are: β-δ time discounting; aversion to missing information about probability (ambiguity); nonlinear weighting of probability; and limited strategic thinking in games.

Four Types:
A third problem with preferences is that there are different types of utilities which do not always coincide. Kahneman (1994) distinguishes four
types: remembered utility, anticipated utility, choice utility and experienced utility. Remembered utility is what people recall liking; anticipated utility is
what they expect to like; choice utility is what they reveal by choosing (classical revealed preference); and experienced utility is what they actually
like when they consume.

Fear of Unknown
The insula (shown in Figure 2) is a region that processes information from the nervous system about bodily states—such as physical pain, hunger, the pain of social exclusion, disgusting odors and choking. This tentative evidence suggests a neural basis for pessimism or ‘‘fear of the unknown’’ influencing choices.

Loss vs. Gain Appeals
Imaging studies show that gains and losses are fundamentally different because losses produce more overall activation and slower response times, and there are differences in
which areas are active during gain and loss; see Camerer, Johnson, Rymon and Sen (1993) and Smith and Dickhaut (2002). Dickhaut, McCabe, Nagode, Rustichini and Pardo (2003) found more activity in the orbito frontal cortex when thinking about gains compared to losses, and more activity in inferior parietal and cerebellar areas when thinking about losses. O’Doherty, Kringelbach, Rolls, Jornak and Andrews (2001) found that losses differentially activated lateral OFC and gains activated medial OFC. Knutson,
Westdorp, Kaiser and Hommer (2000) found strong activation in mesial PFC on both gain and loss trials, and additional activation in anterior cingulate
and thalamus during loss trials.

Probabilities & Two or Three Options (Context Dependence):
For example, in ‘‘Allais paradox’’ choices people appear to overweight low probabilities, give a quantum jump in weight to certain outcomes, and do not distinguish sharply enough between intermediate probabilities; see e.g. Prelec (1998). Rats show this pattern too, and also show other expected utility violations; see e.g. Battalio, Kagel and Green (1995). People also exhibit ‘‘context-dependence’’: whether A is chosen more often than B can depend on the presence of an irrelevant third choice C (which is
dominated and never chosen). Context-dependence means people compare choices within a set rather than assigning separate numerical utilities.

Many neuroscientists believe there is a specialized ‘‘mind-reading’’ (or ‘‘theory of mind’’) area which controls reasoning about what others believe and might do.


Ego vs Other Bias–in terms of Empathy & Strategy:
Iterated thinking: Another area of game theory where neuroscience should prove useful is iterated strategic thinking. A central concept in game theory
is that players think about what others will do, and about what others think they will do, and this reasoning (or some other process, like learning,
evolution or imitation) results in a mutually consistent equilibrium in which each player guesses correctly what others will do (and chooses their
own best response given those beliefs). From a neural view, iterated thinking consumes scarce working memory and also requires one player to put herself
in another player’s ‘‘mind’’. There may be no generic human capacity to do this beyond a couple of steps. Studies of experimental choices, and payoff
information subjects look up on a computer screen, suggest 1–2 steps of reasoning are typical in most populations; cf. e.g. Costa-Gomes, Crawford
and Broseta (2001), Johnson, Camerer, Sen and Tymon (2002), and see Camerer, Ho and Chong (2004).11 Bhatt and Camerer (2004) find differential
activation in the insula in players who are poor strategic thinkers, which they interpret as reflecting self-focus that harms strategizing.

Ambiguity-aversion (i’m curious how this works on the issue of curiosity…)

O’DONOGHUE, T., and M. RABIN (1999): “Doing It Now or Later,” American Economic Review, 89, 103-124.

*****Neuroeconomics: Why Economics Needs Brains*

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