The dual self model in economics: More examples

Dual-self models of consumer decisions in behavioral economics

Dr. Russell James IIITexas Tech University

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

Adam Smith

Loewenstein

Fudenberg & Levine

Bernheim & Rangel; Loewenstein

Shefrin & Thaler

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.

Fudenberg & Levine (2006)

Long-run (patient) self• This side tries to

maximize utility across time

Short-run (impulsive) selves• Sequential selves that exist

only for a brief time• Each cares only about

immediate experience

The “planner” and the “doer”“our work is the first systematic, formal treatment of a two-self economic man.

The conflict between short-run and long-run preferences is introduced by viewing the individual as an organization.

At any point in time the organization consists of a planner and a doer.”

R.H. Thaler (Santa Clara) & H. M. Shefrin (Cornell), 1981, An Economic theory of self-control, Journal of Political Economy, 89(2), 392-406.

R.H. Thaler (Santa Clara) & H. M. Shefrin (Cornell), 1981, An economic theory of self-control, Journal of Political Economy, 89(2), 392-406.

“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.

“the doer

exists only for one period and is

completely selfish or myopic.”

Thaler & Shefrin (1981)

“Planner”• This side tries to

maximize utility across time

“Doer”• Sequential selves that exist

only for a brief time• Each cares only about

immediate experience

Match the concepts

a) Thaler and Shefrin’s “Doer”b) Fudenberg & Levine’s short-run,

impatient selvesc) Fudenberg & Levine’s long-run,

patient selfd) The rational homo economicus of

standard economic theorye) Both C & D

Thaler and Shefrin’s “Planner” is similar to

Match the concepts

a) Thaler and Shefrin’s “Planner”b) Fudenberg & Levine’s short-run,

impatient selvesc) Fudenberg & Levine’s long-run,

patient selfd) The rational homo economicus of

standard economic theorye) Both C & D

Thaler and Shefrin’s “Doer” is similar to

Several economic models identify specific emotions or drives with the short-run/impulsive self.

This approach in economics is actually much older.

Emotions, feelings, and drives

=

Adam Smith: The Father of Modern Economics

1776 published The Wealth of Nations

First modern work of economics

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.

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.

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

“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

“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)”

a) Thaler and Shefrin’s “Doer”b) Fudenberg & Levine’s long-run,

patient selfc) The rational homo economicus

of standard economic theoryd) Thaler and Shefrin’s Plannere) B, C, & D

Adam Smith’s “Impartial Spectator” is similar to…

a) The rational homo economicus of standard economic theory

b) Thaler and Shefrin’s “Planner”c) Fudenberg & Levine’s short-run

impulsive selvesd) Thaler and Shefrin’s “Doer”e) C & D

Adam Smith’s “The Passions” is similar to…

Hot state and cold state models

“cold state (i.e., not hungry, angry, in pain, etc.”

“hot state (i.e., craving, angry,

jealous, sad, etc.)”

G. Loewenstein (Carnegie Mellon), 2000, Emotions in economic theory and economic behavior. American Economic Review, 90(2), p. 428

“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.”

My tastes are different when I am in a cold state Than they are

when I am in a hot state

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

Hot/cold model of addiction

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”

B.D. Bernheim (Stanford) & A. Rangel (Stanford), 2004, Addiction and cue-triggered decision processes, American Economic Review, 94(5), 1558-1590

ReviewWhich of the following is NOT similar to the “cold” state?a) Adam Smith’s “Impartial

Spectator”b) Fudenberg & Levine’s long-run,

patient selfc) The rational homo economicus

of standard economic theoryd) Thaler and Shefrin’s “Planner”e) Adam Smith’s “The Passions”

Review

The “hot” state is similar to

a) The rational homo economicus of standard economic theory

b) Adam Smith’s “The Passions”

c) Fudenberg & Levine’s short-run impulsive selves

d) Thaler and Shefrin’s “Doer”

e) B, C & D

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)”

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.”

Which emotions are in the first system [passions/hot state/affective/visceral]?

Hunger Anger Fear Sexual Lust Thirst Pain

Kindness Generosity Peacefulness Forgiveness Thankfulness Compassion

A B

System Parallels

Hunger Anger Fear Sexual Lust Pain

Kindness Generosity Serenity Forgiveness Thankfulness

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.

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.

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.

An experiment with numbers and cake Shiv & Fedorikhin (1999)

1. Memorize a two-digit number (Group A) or seven-digit number (Group B).

2. Walk to a table and choose between two desserts, chocolate cake and fruit salad.

3. Walk to another room and repeat the memorized number.

OR

What do you think?Which group was more likely to choose the chocolate cake?a) Group memorizing 2-digit number b) Group memorizing 7-digit number chose chocolate cakec) Both were equally likely

OR

When the deliberative “self” is busy…Group memorizing 2-digit number chose chocolate cake

41% of the timeGroup memorizing 7-digit number chose chocolate cake

63% of the time

OR

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.

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.

What do you think?

Which group ate more of the snacksa) Group A (asked to memorize 60 art slides) b) Group B (no memory task)c) 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.

When the deliberative “self” is busy…

A (memory task) B (no memory task)0

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Slides by: Russell James III, J.D., Ph.D., CFP®Associate Professor Division of Personal Financial Planning Texas Tech [email protected]

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