Tag Archives: Heuristics

Self-efficacy and the Pygmalion Effect

April 30, 2017 By in Behavioural Economics, Economics of Education, Evolutionary Economics Tags: , , , , , ,

In any decision involving investments in education there needs to be a consideration of the expected return with respect to expected risk over time. Critically, this requires an assessment of an individual’s own or in the case of parents their child’s ability to achieve an optimal return on their investment in education. The greater the confidence an individual has in achieving a goal, the more resources they will invest. This perception of one’s own ability is called self-efficacy and the greater the belief in one’s self-efficacy the more productive the individual’s efforts (Eden, 1988). However, the complexity of choices in education mean that perceptions are likely to be affected by cognitive biases leading to a problem Benabou and Tirole (2003) termed imperfect self-knowledge.

In this regard, the general availability heuristics (Tversky and Kahneman 1973) play a key role in how individuals resolve information uncertainty and make inferences about their own ability and the perceived ability of others. There are considered to be three general purpose heuristics underlying many intuitive judgements under uncertainty: availability, representativeness, and anchoring with adjustment (Gilovich & Griffin, 2002). These intuitive heuristics are highly efficient decision rules that achieve a good outcome quickly and with little cognitive effort but at the expense of sizeable type 1 errors. For example in social groups, individuals are usually mindful of behaviours that lead to exclusion from a group. Misperceiving a behaviour as leading to ostracism is psychological costly, requiring effort, but is significantly less costly than missing cues that lead to ostracism (Williams, 2007). Continue reading →

Experimental evidence of ‘Intergenerational Egalitarianism’ – Hauser et al 2014: Cooperating with the future

July 25, 2014 By in Behavioural Economics, Experimental Economics, Resource Economics Tags: , , , ,

Hauser, O. P., Rand, D. G., Peysakhovich, A., & Nowak, M. A. (2014). Cooperating with the future. Nature, 511(7508), 220-223.

ABSTRACT: Overexploitation of renewable resources today has a high cost on the welfare of future generations. Unlike in other public goods games, however, future generations cannot reciprocate actions made today. What mechanisms can maintain cooperation with the future? To answer this question, we devise a new experimental paradigm, the ‘Intergenerational Goods Game’. A line-up of successive groups (generations) can each either extract a resource to exhaustion or leave something for the next group. Exhausting the resource maximizes the payoff for the present generation, but leaves all future generations empty-handed. Here we show that the resource is almost always destroyed if extraction decisions are made individually. This failure to cooperate with the future is driven primarily by a minority of individuals who extract far more than what is sustainable. In contrast, when extractions are democratically decided by vote, the resource is consistently sustained. Voting is effective for two reasons. First, it allows a majority of cooperators to restrain defectors. Second, it reassures conditional cooperators that their efforts are not futile. Voting, however, only promotes sustainability if it is binding for all involved. Our results have implications for policy interventions designed to sustain intergenerational public goods.

The key insight of this experiment is that a system based on simple democratic rules can overcome the tendency of small groups of people to rationally over exploit resources in the current generation leading to resource collapse.  Given that there will always be some probability that there will be individuals who rationally have no regard for future generations, resource collapse is (almost) certain to occur.  However, the authors show that simple democratic voting rules binding all participants are effective in restraining this rational, generationally selfish, behaviour.  Consequently, resources are sustained over multiple generations of participants.

This paper dove-tails with a two of key areas related to intergenerational investment & the role of government.

Continue reading →

The complexity of educational choices made by parents for their children

December 31, 2013 By in Behavioural Economics Tags: , , , Leave a comment

At a high level, choice decisions relate to trade-offs between consumption and savings, now and across subsequent time periods subject to constraints and uncertainty.  For parents, educational choices for their children are constrained by the parents’ income, time and regulations, and subject to high levels of uncertainty over very long time frames. Parental choice relating to investments in their children’s education only really occurs in the broad range of the socio-economic ‘middle class’. For the very wealthy, choice is the default of ‘only the best’ which requires little to no effort in decision making despite the cost of the education itself. Parents in low socio-economic conditions lack both the time and experience to research education options and the monetary resources to capture opportunities as they arise, leading to an acquiescence to the default choice of no action.

Rational choice theory suggests that parents are utility maximisers who make decisions from clear value preferences and can be relied upon to make decisions in the best interests of their children (Becker & Tomes 1976, 1979). Yet in deciding which school a child should attend, under rational choice conditions, a parent is required to make a series of complex intergenerational and intertemporal choices that would challenge seasoned economists. Educational choices are predominantly path dependent, subject to imperfect information and in most cases irreversible. Ordinary parents however, need to make these decisions with little training and with limited time to evaluate options. Instead, parents rely on a suite of behavioural heuristics in order to achieve a good outcome for their children.  Individual choice is also context dependent, subject to the experiences of parents, their expectations of the future, a duty to their children and emotional attachment.

How can a parent make optimal decisions in the face of so many possible choices and outcomes? Choices which are necessarily sequential and irreversible once made. To overcome the complexity of choice, humans have developed decision strategies which allow shortcuts to be taken to achieve a ‘good’ outcome in the face of incomplete information and limited time for evaluation. These heuristics, intuitive decision rules, allow mathematically hard problems to be solved under restrictive conditions where a good outcome is achieved at the expense of a perfect outcome. For a parent, a perfect outcome is only possible by chance and impossible by deliberate calculation.

While heuristics are ‘quick & dirty’ solutions, they draw on highly sophisticated underlying processes. Tversky & Kahneman (1983) testing the conjunction rule in likelihood rankings using the classic ‘Bill & Linda’ experiments showed that there was no difference between naïve and sophisticated participants. Experiments undertaken by Gigerenzer & Goldstein (1996) tested the effectiveness of fast and frugal decision heuristics, such as ‘take the best, ignore the rest’, against sophisticated statistical estimation strategies, such as Bayesian networks. Their research showed that fast and frugal heuristics did not fall too far behind a Bayesian network approach. More interestingly, as the quality of available information used for estimation decreased, heuristic strategies became more effective when compared with the more sophisticated strategies.

The complexity of the decision architecture associated with making choices, combining both rational choice and behavioural components, is illustrated in the ‘Choice Process’ diagram below:

The Choice Process

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Becker, G. S., & Tomes, N. 1976. Child Endowments and the Quantity and Quality of Children. The Journal of Political Economy, 84(4), S143-S162.

Becker, GS & Tomes, N 1979, ‘An equilibrium theory of the distribution of income and intergenerational mobility’, The Journal of Political Economy, 1153-1189.

Tversky, A & Kahneman, D 1983, ‘Extensional versus intuitive reasoning: The conjunction fallacy in probability judgment’, Psychological review, 90(4), 293.

Gigerenzer, G & Goldstein, DG 1996, ‘Reasoning the fast and frugal way: models of bounded rationality’, Psychological review, 103(4), 650.

McFadden, D 2001 ‘Economic Choices’, The American Economic Review 91(3): 351-378.

Intergenerational discounting & parental investment in education: Evolutionary basis for a zero discount rate heuristic

December 23, 2013 By in Evolutionary Economics Tags: , , , , , Leave a comment

I will be presenting at the ‘Cooperation and Conflict in the Family’ conference – UNSW in Sydney, Australia from February 2-5 2014. This is a multidisciplinary conference drawing together evolutionary economics, sociology & anthropology.

ABSTRACT This paper discusses the absence of intertemporal discounting in human parent decision making behaviour associated with choices and investments in their children’s education. This behaviour is inconsistent with standard rational choice theory where parents should maximise the present value of the utility of their consumption choices over time. Nor is it consistent with behavioural economics’ expectation that individuals discount consumption choices across time periods hyperbolically. Parents applying a zero discount rate to the expected future returns from investments in their children’s education is however consistent with evolutionary theory. We propose that the proximate cause of this behaviour is a meta-heuristic, intergenerational temporal empathy, which is constructed from a core set of cognitive biases and heuristics so as to cancel out hyperbolic discounting behaviour normally associated with non-offspring investment related consumption across time periods. The ultimate cause of this meta-heuristic is to eliminate the propensity of hyperbolic discounting behaviour to under-invest in offspring development, thereby ensuring that inclusive fitness is maximised. Intergenerational temporal empathy also has characteristics of a positive feedback mechanism ensuring that beneficial educational strategies are propagated forward and may help explain divergent outcomes for low socio-economic groups where poor educational investment decisions tend to be reinforced across generations.