Examples of the use of the dual-self model of consumer decision-making in economics

1. Dual-self models of consumer decisions in behavioral economics Dr. Russell James III Texas Tech University

2. Examples of dual-self models in behavioral economics Short-term/impulsive Doer Passions Affective/Visceral Hot state Long-term/patient Planner Impartial spectator Deliberative Cold state Fudenberg & Levine Shefrin & Thaler Adam Smith Loewenstein Bernheim & Rangel; Loewenstein

3. Short-run impulsive & long-run patient “Our theory proposes that many sorts of decision problems should be viewed as a game between a sequence of short-run impulsive selves and a long-run patient self.” Drew Fudenburg (Harvard U.) and David K. Levine (Washington U.), 2006, A dual-self model of impulse control. American Economic Review, 96(5), 1449-1476.

6. “The planner is concerned with lifetime utility…” R.H. Thaler (Santa Clara) & H. M. Shefrin (Cornell), 1981, An economic theory of self-control, Journal of Political Economy, 89(2), 392-406.

7. “the doer exists only for one period and is completely selfish or myopic.” R.H. Thaler (Santa Clara) & H. M. Shefrin (Cornell), 1981, An economic theory of self-control, Journal of Political Economy, 89(2), 392-406.

10. Match the concepts Thaler and Shefrin’s “Doer” is similar to Thaler and Shefrin’s “Planner” Fudenberg & Levine’s short-run, impatient selves Fudenberg & Levine’s long-run, patient self The rational homo economicus of standard economic theory Both C & D

11. Several economicmodels identifyspecificemotions or drives with the short-run/impulsive self. This approach in economics is actually much older. Emotions, feelings, and drives =

12. Adam Smith: The Father of Modern Economics 1776 published The Wealth of Nations First modern work of economics

13. Before The Wealth of Nations In 1758 Adam Smith published The Theory of Moral Sentiments. This work provided the underpinnings to The Wealth of Nations.

14. The passions and the spectator “In his first book, The Theory of Moral Sentiments, Smith argued that behavior was determined by the struggle between what Smith termed the ‘passions’ and the ‘impartial spectator.’ N. Ashraf (Harvard), C. Camerer (Cal Tech), G. Loewenstein (Carnegie-Mellon), 2005, Adam Smith, behavioral economist. The Journal of Economic Perspectives, 19(3), 131-145 v.

15. “The passions included drives such as hunger and sex, emotions such as fear and anger, and motivational feeling states such as pain…” N. Ashraf (Harvard), C. Camerer (Cal Tech), G. Loewenstein (Carnegie-Mellon), 2005, Adam Smith, behavioral economist. The Journal of Economic Perspectives, 19(3), 131-145

16. “The spectator, in contrast, ‘does not feel the solicitations of our present appetites. To him the pleasure which we are to enjoy a week hence, or a year hence, is just as interesting as that which we are to enjoy this moment’ (IV, ii, 272)” N. Ashraf (Harvard), C. Camerer (Cal Tech), G. Loewenstein (Carnegie-Mellon), 2005, Adam Smith, behavioral economist. The Journal of Economic Perspectives, 19(3), 131-145

17. Adam Smith’s “Impartial Spectator” is similar to… Thaler and Shefrin’s “Doer” Fudenberg & Levine’s long-run, patient self The rational homo economicus of standard economic theory Thaler and Shefrin’s Planner B, C, & D

18. Adam Smith’s “The Passions” is similar to… The rational homo economicus of standard economic theory Thaler and Shefrin’s “Planner” Fudenberg & Levine’s short-run impulsive selves Thaler and Shefrin’s “Doer” C & D

19. Hot state and cold state models G. Loewenstein (Carnegie Mellon), 2000, Emotions in economic theory and economic behavior. American Economic Review, 90(2), p. 428 “cold state (i.e., not hungry, angry, in pain, etc.” “hot state (i.e., craving, angry, jealous, sad, etc.)”

20. “a person’s instantaneous utility can be written as u(c,s), where c is her consumption and s is a ‘state’ that parameterizes her tastes.” G. Loewenstein (Carnegie Mellon), T. O’Donoghue (Cornell), M. Rabin (UC-Berkeley), 2003, Projection bias in predicting future utility. Quarterly Journal of Economics, 118(4), 1210 My tastes are different when I am in a cold state Than they are when I am in a hot state

21. Hot/cold model of addiction B.D. Bernheim (Stanford) & A. Rangel (Stanford), 2004, Addiction and cue-triggered decision processes, American Economic Review, 94(5), 1558-1590 The individual may also operate in a “cold” mode, wherein he considers all alternatives and contemplates all consequences.” “the individual may enter a “hot” decision-making mode in which he always consumes the substance”

22. Review Which of the following is NOT similar to the “cold” state? Adam Smith’s “Impartial Spectator” Fudenberg & Levine’s long-run, patient self The rational homo economicus of standard economic theory Thaler and Shefrin’s “Planner” Adam Smith’s “The Passions”

23. Review The “hot” state is similar to The rational homo economicus of standard economic theory Adam Smith’s “The Passions” Fudenberg & Levine’s short-run impulsive selves Thaler and Shefrin’s “Doer” B, C & D

24. Affective and deliberative systems “We develop a two-system model in which a person’s behavior is the outcome of an interaction between… G. Loewenstein (Carnegie Mellon) and T. O’Donoghue (Cornell), 2004, Animal spirits: Affective and deliberative processes in economic behavior, p. 1 “affective system that encompasses emotions such as anger and fear and motivational drives such as those involving hunger and sex.” “deliberative system that assesses options with a broad, goal-based perspective (roughly along the lines of the standard economic conception)”

25. Visceral factors and rationality “Visceral factors refer to a wide range of negative emotions (e.g., anger, fear), drive states (e.g., hunger, thirst, sexual desire), and feeling states (e.g., pain), that grab people's attention and motivate them to engage in specific behaviors… G. Loewenstein, 2000, Emotions in economic theory and economic behavior. American Economic Review, 90(2), 426-432, p. 426 I restrict attention to negative emotions because their effects resemble those of drive states such as hunger and feeling states such as pain. The effects of positive emotions are more subtle and complex.”

26. Which emotions are in the first system [passions/hot state/affective/visceral]? A B Hunger Anger Fear Sexual Lust Thirst Pain Kindness Generosity Peacefulness Forgiveness Thankfulness Compassion

27. System Parallels The emotions and drives selected for the “the passions,” “affective system,” or “hot state” are also associated with “short-term/impulsive” behavior. The emotions and drives excluded are more likely to be associated with “long-term/patient” behavior. Kindness Generosity Serenity Forgiveness Thankfulness Hunger Anger Fear Sexual Lust Pain

28. Hunger: An example of affective and deliberative conflict The affective system desires immediate gratification. The deliberative system considers longer-term effects on weight, appearance, and health based upon calorie content, fat, sugar, etc.

29. Affective and deliberative conflict If “self-control” in decision is the outcome of conflict between the deliberative and the affective systems, what happens if the deliberative system is busy with another task? An experiment to test this was conducted by Dr. Baba Shiv (University of Iowa) and Dr. Alexander Fedorikhin (Washington State University). Shiv, B. & Fedorikhin, A. (1999). Heart and mind in conflict: The interplay of affect and cognition in consumer decision making. Journal of Consumer Research, 26(2), 278-292.

30. An experiment with numbers and cake Shiv & Fedorikhin (1999) Memorize a two-digit number (Group A) or seven-digit number (Group B). Walk to a table and choose between two desserts, chocolate cake and fruit salad. Walk to another room and repeat the memorized number. OR

31. What do you think? Which group was more likely to choose the chocolate cake? Group memorizing 2-digit number Group memorizing 7-digit number chose chocolate cake Both were equally likely OR

32. When the deliberative “self” is busy… Group memorizing 2-digit number chose chocolate cake 41% of the time Group memorizing 7-digit number chose chocolate cake 63% of the time OR

33. An experiment with art and cookies Experiment with undergraduate female participants who were dieting. Group A asked to memorize 60 art slides in preparation for a recognition test. Group B had no memory task. Conducted by Dr. Andrew Ward (Swarthmore College) and Dr. Traci Mann (UCLA). Ward, A., & Mann, T. (2000). Don’t mind if I do: Disinhibited eating under cognitive load. Journal of Personality and Social Psychology, 78(4), 753-763.

34. An experiment with art and cookies Participants in both conditions were requested to have a snack as part of the experiment. Left with large bowls of Doritos, M&M's, and chocolate chip cookies during the 10-minute task.

35. What do you think? Which group ate more of the snacks Group A (asked to memorize 60 art slides) Group B (no memory task) Both group about the same Dr. Andrew Ward (Swarthmore College) and Dr. Traci Mann (UCLA). Ward, A., & Mann, T. (2000). Don’t mind if I do: Disinhibited eating under cognitive load. Journal of Personality and Social Psychology, 78(4), 753-763.

36. When the deliberative “self” is busy…

37. Slides by: Russell James III, J.D., Ph.D., CFP® Associate Professor Division of Personal Financial Planning Texas Tech University russell.james@ttu.edu Please use these slides! If you think you might use anything here in a classroom, please CLICK HEREto let me know. Thanks! The outline for this behavioral economics series is at http://www.slideshare.net/rnja8c/outline-for-behavioral-economics-course-component