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Behavioral Economics

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This clip with Dan Ariely telling off a dentist who tried to sell him on a more expensive item is classic. Would that we all behaved in such a manner, no? The problem when you interact with a particular set of professionals, in particular in healthcare, the information asymmetry is such that it is very difficult for you to make an informed choice as a consumer. I’ve had an experience very similar to Ariely with dentists.

The problem here though that is that dentists are professionals. In other words, they should be motivated by something other than the profit motive. Ergo, we (the public) confer upon the profession licensing for exclusive services. The problem is that professionals are not immune from incentives. On the conscious level it seems that professionals generally do perform services without the profit motive in mind (e.g., dentists and doctors encourage your toward good health).* The problem is that on the unconscious and implicit level is where subtle biases and preferences come to the fore.

Naturally professionals don’t want to admit that they have biases. I’ve listened to Dr. Thomas P. Stossel dismiss the possibility that gifts and perks by pharmaceutical companies might have an effect on their practice. Stossel’s assumption seems to be that as smart and educated professionals of course doctors wouldn’t allow such practices to bias their judgment. First, just because you have a medical degree doesn’t make you the genius of all things. A psychologist or economist he is not. Second, these firms themselves have marketing professionals who likely are aware of some of the literature on influencing people.

The point here is that there are no gods. Professionals are humans as well, and they are providing you services. Unfortunately because of the way medical insurance is designed in the United States we don’t see the price of these services, ergo, one reason for inflation in the health care sector (insurance companies have had difficulties imposing price pressure; they’re less popular than hospitals). Ultimately one thing we can do is behave in a more critically rational manner. I’m going to see a dentist in the next month for a basic check-up, and my consciousness has been raised by Ariely’s points (I probably wouldn’t be as direct as he was, but I’m going to be firm in not being persuaded into something before doing my own research).

Of course one problem with this tack is that turning something into a consumer-monetized transaction changes the interaction. Often not for the better. Ariely himself pointed this out in Predictably Irrational. Right now professionals have some moral and cultural pressure to not behave as financial optimizers. If consumers start to behave like…consumers, then they may change in response.

* I believe that in the modern American context many professional organizations operate as guild which are engaging in rent-seeking, but that is a different discussion.

• Category: Economics, Science • Tags: Behavioral Economics 
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One of the major parameters which shape individual success, and macroeconomic growth in the aggregate, is time preference. Time preference basically measures an individual’s future-time orientation. Would you for example take $1,000 in the present, or wait 30 days and accept $1,500 dollars? It doesn’t need to be money, children can exhibit time preference as well. Would you like one candy bar now? Or two candy bars in an hour? I also think time preference permeates our lives more concretely. Would you like to eat some greasy food now, or would you forgo epicurean pleasures in the present for a sleeker frame in the future?

Here’s an illustration of the correlates of time preference:

In one of the most amazing developmental studies ever conducted, Walter Michel of Stanford created a simple test of the ability of four year old children to control impulses and delay gratification. Children were taken one at a time into a room with a one-way mirror. They were shown a marshmallow. The experimenter told them he had to leave and that they could have the marshmallow right then, but if they waited for the experimenter to return from an errand, they could have two marshmallows. One marshmallow was left on a table in front of them. Some children grabbed the available marshmallow within seconds of the experimenter leaving. Others waited up to twenty minutes for the experimenter to return. In a follow-up study (Shoda, Mischel, & Peake, 1990), children were tested at 18 years of age and comparisons were made between the third of the children who grabbed the marshmallow (the “impulsive”) and the third who delayed gratification in order to receive the enhanced reward (“impulse controlled”).

The third of the children who were most impulsive at four years of age scored an average of 524 verbal and 528 math. The impulse controlled students who scored 610 verbal and 652 math! This astounding 210 point total score difference on the SAT was predicted on the basis of a single observation at four years of age! The 210 point difference is as large as the average differences between that of economically advantaged versus disadvantaged children and is larger than the difference between children from families with graduate degrees versus children whose parents did not finish high school! At four years of age gobbling a marshmallow now v. waiting for two later is twice as good a predictor of later SAT scores than is IQ.

The issue of causality is probably one which you will immediately bring up. There is a correlation between higher IQ and low time preference (consuming less in the present to have a potential for more consumption in the future), but who knows how the feedback loops here work? For example, unlike many males my age I gave up playing video games around the age of 16. I calculated that I was substituting video games for reading, and that that would have long term consequences which I was not pleased with. Video games were very pleasurable in the short term, addictive even. But I decided that there simply were not enough hours in the day that I could do everything I needed to do, so I stopped playing them (I am aware that many, many, very smart people are avid video game enthusiasts. I’m just using it to illustrate the trade offs one might make). How much less erudite, as Dr. Dan MacArthur might say, would I be if I did continue to expend many hours per week on video games?

A new working paper on the SSRN website has some interesting data on time preference cross-culturally. How Time Preferences Differ: Evidence from 45 Countries:

We present results from the first large-scale international survey on time discounting, conducted in 45 countries. Cross-country variation cannot simply be explained by economic variables such as interest or inflation rates. In particular, we find strong evidence for cultural differences, as measured by the Hofstede cultural dimensions. For example, large levels of Uncertainty Avoidance are associated with strong hyperbolic discounting. We also find relations between time preferences and risk preferences, like loss aversion. For instance, subjects with high loss aversion tend to show larger time discounting. Moreover, our analysis shows an impact of time preferences on the capability of technological innovations in a country and on environmental protection.

To get published in orthodox economics you need to do a lot of mathematical modeling, but I’m not too interested in that. Rather, let’s look at some of the descriptive results. The first two figures shows the percentage of participants who chose the $3800 option when they were asked to choose between $3400 this month or $3800 next month. The last figure has on the x-axis “time pace.” This is an overall-pace measure is calculated out of three measures: walking speed, postal speed, and clock accuracy.

Some of the text is very illuminating as to cross-cultural differences:

Even for the students from Princeton University, the percentage choosing the patient option is lower than the percentage of German students (80% vs. 89%). Actually some students from our Norway survey even complained that the question was ridiculous because everybody would choose to wait for one month given the high implicit interest rate.

Other results were not surprising:

This result suggests that although the wealth level (and hence a general level of a country’s economy) is crucial to stimulate innovation, the attitude towards future also plays an important role. For example, while 69% of Taiwanese participants prefer to wait in the one-month question, only 44% of our Italian students prefer to wait. The two countries have the same GDP per capita in 2007, but Taiwan scored much higher in the innovation factor than Italy (5.26 vs. 4.19). It is worthwhile to investigate further to what extent and under what mechanism a general attitude towards future is related to the innovation activity.

And yet some were (at least to me):

After controlling the macro-economic variables (GDP per capita, growth rate, inflation rate), participants from countries with higher degree of Individualism and Long Term Orientation are more likely to wait. In contrast, for the present bias and long-term discount factor, the country with higher Uncertainty Avoidance score tend to discount the next year more.

In other words, societies and individuals who were more individualistic tended to have low time preference (more future-time orientation). It would be interesting to further decouple confounding variables. I assume that more intelligent people are more individualistic as well, so that might be the source of the correlation.

I didn’t focus on the formal model too much here because this seems highly exploratory, and there were many non-significant results. But I think this paragraph is of some interest:

In summary, it seems that we need different models for waiting tendency and medium/long-term discount factor. The waiting tendency depends more on the fundamental economic variables such as the country’s wealth level, and on general attitudes in a society such as individualism and the mentality towards past and future. In comparison, the medium/long-term discount factor depends more on the dynamic factors such as growth rate, and the attitudes toward uncertainty.

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I just got back from a European trip, and I have to say I did not miss tipping. I especially appreciated not having to do the song & dance typical of larger groups in sit-down restaurants in the USA where you figure out how much you’re going to tip on a communal basis, when everyone has different tipping set points and perceptions of service and such. The money is less of an issue than the extra wasted time at the end of a meal & drinks which are spent on the terms of calculation rather than more conventional conviviality. In fact now that I think about it way too much time in my life has been spent discussing the etiquette of tipping, often outside of a situation where people are going to have to tip imminently. I thought about this after seeing this post in The Atlantic on tipping. One correspondent observes:

I lived in Japan for a while. There is no tipping there, and it works great. If we could be like Japan, I’d be all for it. However, I don’t think we’d be like Japan. Anytime I have ever eaten somewhere that does not practice tipping, service has been abysmal. Customers herded through like cattle, dishes brought out late, then diners rushed through them, eyes rolled, etc. We just do not have the service culture that would allow us to disconnect pay from performance and continue to expect the same kind of service.

The point about national culture is well taken. I experienced some bad service in Italy and Finland, but the quality of badness was very different, in keeping what with you’d expect from the respective national cultures (though in general I experienced service as good as in the states in both places).* But the empirical observation about American restaurants without tipping having lesser service suffers from sampling bias. Establishments which don’t have tipping are generally lower-end, verging on cafeterias. So it’s not an apples to apples comparison. A better one would be looking at higher end restaurants which have mandatory gratuities for large groups vs. those which do not. Even here you have the peculiar distortion of the larger group, which can often be more difficult for a server to manage.

Of course one’s perspective on this probably varies by the amount of disposable income one has. If you don’t have much disposable income the small but repeated investments of time & energy which go into tipping might be worthwhile if you can manage to pay less than you would otherwise. If you have a fair amount of disposable income the marginal potential savings introduced by greater price variation which you can control at the cost of time & energy needed may not be worth it.

* I had to bargain very hard with a Finnish server on whether I could handle Indian levels of spiciness. This was obviously a well rehearsed conversation on her part, but I thought she should have updated her priors in my case. The lighting was dim, but not that dim. Usually American servers at Indian restaurants aren’t too resistant when I assert I can handle high levels of spice.

• Category: Science • Tags: Behavioral Economics, Culture 
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Tyler Cowen points me to this article from last spring about the profligacy of professional athletes. Here are numbers which seem constructed for the sake of plausibility more than anything else:

* By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.

* Within five years of retirement, an estimated 60% of former NBA players are broke.

It shouldn’t be that hard to track down a large number of former players and try and make the sample representative, and assess what their financial situation is. This looks like a “natural experiment” waiting to be mined for data (perhaps someone already has, if so, pointers in the comments welcome). Here’s the part which shows time preference inclinations most starkly:

Given all the pressures on a pro athlete’s marriage, one safety valve might be the prenuptial agreement-something “very strongly” recommended by agent David Falk, who surged to prominence representing Michael Jordan (who did not have one). “The percentage of prenups amongst athletes is appreciably lower compared with nonathletes at the same economic level,” says celebrity divorce lawyer Raoul Felder, who has represented the ex-wives of Patrick Ewing, Jason Kidd and Mike Tyson.

In 1994, when NBA center Dikembe Mutombo was engaged to Michelle Roberts, a med student, Roberts refused to sign a premarital contract the day before the wedding. Five hundred guests-including a large party from Mutombo’s native Democratic Republic of Congo-had begun flying in to Washington. “[Roberts] never signed,” Falk says, “and Mutombo never married the girl.” Calling off the nuptials reportedly cost him $250,000.

It’s no coincidence that the woman a pro athlete often chooses to marry-and often at a young age-is his hometown sweetheart. For that reason he can’t envision a ruinous divorce. “That was how you could tell if she really liked you, if she knew you before you made it,” says West. But when a player does make it? “The question [for the athlete] becomes, When you get off the farm and see Paris, so to speak, can you really go back to the farm?”

Children almost always complicate the issue. How to limit paternity obligations is a challenge for pro athletes. Former NBA forward Shawn Kemp (who has at least seven children by six women) and, more recently, Travis Henry (nine by nine) have seen their fortunes sapped by monthly child-support payments in the tens of thousands of dollars. Last month Henry, who reportedly earned almost $11 million over seven years in the NFL, tried and failed to temporarily reduce one of his nine child-support payments by arguing that he could no longer afford the $3,000 every month. Two weeks later he was jailed for falling $16,600 behind in payments for his child in Frostproof, Fla.

Mutumbo as an exceptional case is informative, he was not recruited as a student athlete initially, and managed to complete a degree in linguistics and diplomacy at Georgetown (David Robinson, who scored a 1320 on the pre-recentered SAT and received a degree in math from the Naval Academy, is probably an even better example).

• Category: Science • Tags: Behavioral Economics 
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Expectations influence sensory experience in a wine tasting:

Information about a product may shape consumers’ taste experience. In a wine tasting experiment, participants received (positive or negative) information about the wine prior to or after the tasting. When the information was given prior to the tasting, negative information about the wine resulted in lower ratings compared to the group that received positive information. No such effect was observed when participants received the information after the tasting but before they evaluated the wine. Results suggest that the information about the wine affected the experience itself and not only participants’ overall assessment of the wine after the tasting.

Also, see ScienceDaily for a summary. Felix Salmon has another post, Tasting wine blind.

• Category: Science • Tags: Behavioral Economics 
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Gender differences in financial risk aversion and career choices are affected by testosterone:

Women are generally more risk averse than men. We investigated whether between- and within-gender variation in financial risk aversion was accounted for by variation in salivary concentrations of testosterone and in markers of prenatal testosterone exposure in a sample of >500 MBA students. Higher levels of circulating testosterone were associated with lower risk aversion among women, but not among men. At comparably low concentrations of salivary testosterone, however, the gender difference in risk aversion disappeared, suggesting that testosterone has nonlinear effects on risk aversion regardless of gender. A similar relationship between risk aversion and testosterone was also found using markers of prenatal testosterone exposure. Finally, both testosterone levels and risk aversion predicted career choices after graduation: Individuals high in testosterone and low in risk aversion were more likely to choose risky careers in finance. These results suggest that testosterone has both organizational and activational effects on risk-sensitive financial decisions and long-term career choices.

• Category: Science • Tags: Behavioral Economics 
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Robert Frank is promoting his idea that Charles Darwin will become more important than Adam Smith as an intellectual forebear of future economics in The New York Times. That is fine as it goes but I suspect that the bigger issue in the sciences of humanity is that there will be problems with relying on only one disciplinary framework and one general model. For example Frank points out that evolutionary fitness is generally conceived of in a relative sense (population mean fitness being the baseline), but the same dynamic crops up in neuroscience due to biophysical computational efficiencies from relative heuristics as opposed to a laundry list of absolute fixed preferences. R. A. Fisher famously wished to lay the seedbed for a thermodynamics of evolution in The Genetical Theory of Natural Selection. Whether one can envisage this in evolutionary genetics, it seems even less likely in the human sciences, at least to the extent of making a generalization which is not trivial. The rut which orthodox evolutionary psychology has found itself in is probably due to this assumption that our species is at some biobehavioral equilibrium due to an exceedingly unrealistic model of evolutionary dynamics.

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The Oxytocin Receptor (OXTR) Contributes to Prosocial Fund Allocations in the Dictator Game and the Social Value Orientations Task:

The demonstration that genetic polymorphisms for the OXTR are associated with human prosocial decision making converges with a large body of animal research showing that oxytocin is an important social hormone across vertebrates including Homo sapiens. Individual differences in prosocial behavior have been shown by twin studies to have a substantial genetic basis and the current investigation demonstrates that common variants in the oxytocin receptor gene, an important element of mammalian social circuitry, underlie such individual differences.

Here’s a figure from the paper:

And the SNPs from the HGDP (G = C & A = T for the first SNP, or at least the paper and PubMed agree on this):

Related: It’s hard out here for a vole. Heritability of the Ultimatum Game. Altruism and Risk-Taking: Kinda Heritable. Can someone put the psychic unity of makind out of its misery? DRD4, politics & friendship.

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A Genetically Mediated Bias in Decision Making Driven by Failure of Amygdala Control:

Genetic variation at the serotonin transporter-linked polymorphic region (5-HTTLPR) is associated with altered amygdala reactivity and lack of prefrontal regulatory control. Similar regions mediate decision-making biases driven by contextual cues and ambiguity, for example the “framing effect.” We hypothesized that individuals hemozygous for the short (s) allele at the 5-HTTLPR would be more susceptible to framing. Participants, selected as homozygous for either the long (la) or s allele, performed a decision-making task where they made choices between receiving an amount of money for certain and taking a gamble. A strong bias was evident toward choosing the certain option when the option was phrased in terms of gains and toward gambling when the decision was phrased in terms of losses (the frame effect). Critically, this bias was significantly greater in the ss group compared with the lala group. In simultaneously acquired functional magnetic resonance imaging data, the ss group showed greater amygdala during choices made in accord, compared with those made counter to the frame, an effect not seen in the lala group. These differences were also mirrored by differences in anterior cingulate-amygdala coupling between the genotype groups during decision making. Specifically, lala participants showed increased coupling during choices made counter to, relative to those made in accord with, the frame, with no such effect evident in ss participants. These data suggest that genetically mediated differences in prefrontal–amygdala interactions underpin interindividual differences in economic decision making.

Check out the Wikipedia entry on 5-HTTLPR; lots of behavioral phenotypes associated with this variant. ScienceDaily:

The researchers also measured the degree of interaction, or connectivity, between the amygdala and the prefrontal cortex, the brain region most implicated in human intelligence, personality and decision making. When resisting the frame effect, the participants with two copies of the long variant had stronger connectivity between the prefrontal cortex and amygdala, while those with a pair of short variants did not.

“This difference in connectivity is really interesting,” says Dr Roiser. “It suggests that the volunteers carrying the long variant might regulate automatic emotional responses, which are driven by the amygdala, more efficiently, lessening their vulnerability to the framing effect.

“This one gene cannot tell the whole story, however, as it only explains about ten per cent of the variability in susceptibility to the framing effect. What determines the other ninety per cent of variability is unclear. It is probably a mixture of people’s life experience and other genetic influences.

“An interesting question would be whether the gene might affect real-life decision-making. For example, traders in banks need to make quick and accurate estimations of risk and consistent decisions, no matter how the information is presented to them. So you might hypothesise that traders with the long genetic variant would make more consistent decisions, though this needs to be tested in future research.”

So this genetic variation only explains 10% of the variation within the population when it comes to frame effect in behavioral economics. Fair enough. But, I do wonder if in the current political environment fewer would oppose genetically black-balling individuals with the short variants of 5-HTTLPR from becoming traders! (I’m not proposing this seriously myself, but I think there might be some amygdala-driven acceptance of this sort of genetic profiling right now even if the returns are small)

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Cognitive skills affect economic preferences, strategic behavior, and job attachment:

Economic analysis has so far said little about how an individual’s cognitive skills (CS) are related to the individual’s economic preferences in different choice domains, such as risk taking or saving, and how preferences in different domains are related to each other. Using a sample of 1,000 trainee truckers we report three findings. First, there is a strong and significant relationship between an individual’s CS and preferences. Individuals with better CS are more patient, in both short- and long-run. Better CS are also associated with a greater willingness to take calculated risks. Second, CS predict social awareness and choices in a sequential Prisoner’s Dilemma game. Subjects with better CS more accurately forecast others’ behavior and differentiate their behavior as a second mover more strongly depending on the first-mover’s choice. Third, CS, and in particular, the ability to plan, strongly predict perseverance on the job in a setting with a substantial financial penalty for early exit. Consistent with CS being a common factor in all of these preferences and behaviors, we find a strong pattern of correlation among them. These results, taken together with the theoretical explanation we offer for the relationships we find, suggest that higher CS systematically affect preferences and choices in ways that favor economic success.

From the discussion:

The novel relationships we find have potentially deep implications. For example, Gregory Clark recently suggested that the initial location of the industrial revolution in England may have been due to a “survival of the richest” selection process, that operated there from as early as 1250 C.E…This selection may have been cultural, genetic, or both. He suggests that selection favored “capitalist” traits that include several of the ones (e.g. risk taking and saving propensity) we analyze herein. Were these traits independent, it is hard to imagine how a selection process could induce such a bundled concentration in the time frame suggested. But if these traits are correlated due to their linkage with cognitive skills, then a “selection of the richest” explanation, operating through selection for cognitive skills, becomes more plausible….

• Category: Economics, Science • Tags: Behavioral Economics, Economics 
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Steve points out that Geoffrey Miller has a new book that’s going to come out soon, Spent: Sex, Evolution, and Consumer Behavior. More directly related to the topic of sex and decision-making, The Heat of the Moment: The Effect of Sexual Arousal on Sexual Decision Making. Read the whole paper, but I have a figure from it below….

• Category: Science • Tags: Behavioral Economics 
Razib Khan
About Razib Khan

"I have degrees in biology and biochemistry, a passion for genetics, history, and philosophy, and shrimp is my favorite food. If you want to know more, see the links at"