Well, just to take the things Matt Rabin has written recently that
are on my desk...
"Inference by Believers in the Law of Small Numbers,"
Many people believe in the "Law of Small Numbers," exaggerating the
degree to which a small sample resembles the population from which it
is drawn. To model this, I assume that a person exaggerates the
likelihood that a short sequence of i.i.d. signals resembles the
long-run rate at which those signals are generated. Such a person
believes in the "gambler's fallacy", thinking early draws of one
signal increase the odds of next drawing other signals. When
uncertain about the rate, the person over-infers from short sequences
of signals, and is prone to think the rate is more extreme than it
is. When the person makes inferences about the frequency at which
rates are generated by different sources-such as the distribution of
talent among financial analysts-based on a few observations from each
source, he tends to exaggerate how much variance there is in the
rates. Hence, the model predicts that people may pay for financial
advice from "experts" whose expertise is entirely illusory. Other
economic applications are discussed.
"Social Preferences: Some Simple Tests and a New Model"
Departures from pure self-interest in economic experiments have
recently inspired models of "social preferences". We conduct
experiments on simple two-person and three-person games with binary
choices that test these theories more directly than the array of
games conventionally considered. Our experiments show strong support
for the prevalence of "quasi-maximin" preferences: People sacrifice
to increase payoffs for all recipients, but especially for the
lowest-payoff recipients. People are also motivated by reciprocity:
While people are reluctant to sacrifice to reciprocate good or bad
behavior beyond what they would sacrifice for neutral parties, they
withdraw willingness to sacrifice to achieve a fair outcome when
others are themselves unwilling to sacrifice. Some participants are
averse to getting different payoffs than others, but based on our
experiments and reinterpretation of previous experiments we argue
that behavior that has been presented as "difference aversion" in
recent papers is actually a combination of reciprocal and
quasi-maximin motivations. We formulate a model in which each player
is willing to sacrifice to allocate the quasi-maximin allocation only
to those players also believed to be pursuing the quasi-maximin
allocation, and may sacrifice to punish unfair players.
"Psychology and Economics"
Because psychology systematically explores human judgment, behavior,
and well- being, it can teach us important facts about how humans
differ from traditional economic assumptions. In this essay I discuss
a selection of psychological findings relevant to economics. Standard
economics assumes that each person has stable, well-defined
preferences, and that she rationally maximizes those preferences.
Section 2 considers what psychological research teaches us about the
true form of preferences, allowing us to make economics more
realistic within the rational-choice framework. Section 3 reviews
research on biases in judgment under uncertainty; because those
biases lead people to make systematic errors in their attempts to
maximize their preferences, this research poses a more radical
challenge to the economics model. The array of psychological findings
reviewed in Section 4 points to an even more radical critique of the
economics model: Even if we are willing to modify our familiar
assumptions about preferences, or allow that people make systematic
errors in their attempts to maximize those preferences, it is
sometimes misleading to conceptualize people as attempting to
maximize well-defined, coherent, or stable preferences.
"Moral Preferences, Moral Constraints, and Self-Serving Biases"
Economists have formally modeled moral dispositions by directly
incorporating into utility analysis concern for the well-being of
others. But sometimes moral dispositions are not preferences, as
connoted by utility analysis, but rather are ingrained as (internal)
constraints. I present a model fleshing out this distinction: If
moral dispositions are internal constraints on a person's real goal
of pursuing her self-interest, she will be keen to self-servingly
gather, avoid, and interpret relevant evidence, for the purpose of
relaxing this constraint and pursuing her self interest. This gives
rise to self-serving biases in moral reasoning. I show that this
alternative model has some implications different from a standard
utility model. Specifically, because a person seeks to avoid
information that interferes with her self-interest, the scope for
social influence in moral conduct is greater than it is in the
conventional model. Outside parties can improve a person's moral
conduct by a) forcing her to receive certain information, b)
discouraging her from (selectively) thinking about other information,
or c) encouraging her to think through moral principles before she
knows where her self interest lies.
And then there is the Thaler and Rabin piece forthcoming in the
_Journal of Economic Perspectives_ in which they first take aim at
economists' belief that attitudes toward risk and willingness to
accept gambles is determined by the diminishing marginal utility of
wealth, and then blow this von Neumann-Morgenstern utility
maximization understanding of choice under uncertainty away with both
barrels...
Brad DeLong
