Animal Spirits Affective and Deliberative Processes in Economic Behavior

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Animal SpiritsAffective and Deliberative
Processes in Economic Behavior
George Loewenstein Ted ODonoghue
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Ed Lazear, "Economic Imperialism" Economic
Journal,2000.

• law
• political science
• history
• Demography
• ..

• spending/saving
• insurance
• labor market behavior
• bargaining
• investing
• medical decision making
• gambling
• criminal behavior
• fertility/sex
• charity/altruism
• dieting
• addiction
• suicide

"individuals engage in maximizing rational
behavior"
3
The craving for power which characterizes the
governing class in every nation is hostile to any
limitation of the national sovereignty. This
political power hunger is often supported by the
activities of another group, whose aspirations
are on purely mercenary, economic
lines Letter from Albert Einstein to
Sigmund Freud (1932)
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The craving for power which characterizes the
governing class in every nation is hostile to any
limitation of the national sovereignty. This
political power hunger is often supported by the
activities of another group, whose aspirations
are on purely mercenary, economic lines How is
it that these devices succeed so well in rousing
men to such wild enthusiasm, even to sacrifice
their lives? Only one answer is possible.
Letter from Albert Einstein to Sigmund
Freud
5
The craving for power which characterizes the
governing class in every nation is hostile to any
limitation of the national sovereignty. This
political power hunger is often supported by the
activities of another group, whose aspirations
are on purely mercenary, economic lines How is
it that these devices succeed so well in rousing
men to such wild enthusiasm, even to sacrifice
their lives? Only one answer is possible. Because
man has within him a lust for hatred and
destruction. In normal times this passion exists
in a latent state, it emerges only in unusual
circumstances but it is a comparatively easy
task to call it into play and raise it to the
power of a collective psychosis. Here lies,
perhaps, the crux of all the complex factors we
are considering, an enigma that only the expert
in the lore of human instincts can resolve.
Letter from Albert Einstein to Sigmund Freud
6
The craving for power which characterizes the
governing class in every nation is hostile to any
limitation of the national sovereignty. This
political power hunger is often supported by the
activities of another group, whose aspirations
are on purely mercenary, economic lines How is
it that these devices succeed so well in rousing
men to such wild enthusiasm, even to sacrifice
their lives? Only one answer is possible. Because
man has within him a lust for hatred and
destruction. In normal times this passion exists
in a latent state, it emerges only in unusual
circumstances but it is a comparatively easy
task to call it into play and raise it to the
power of a collective psychosis. Here lies,
perhaps, the crux of all the complex factors we
are considering, an enigma that only the expert
in the lore of human instincts can resolve.
Letter from Albert Einstein to Sigmund Freud
Freuds response You have stated the gist of
the matter in your letter--and taken the wind out
of my sails!
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• And, another experts opinion
• Arguments must be crude, clear and forcible and
  appeal to emotions and instincts, not the
  intellect. Truth was unimportant and entirely
  subordinate to tactics and psychology.
• Hermann Goering

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Affect is also important in every-day economic
activity..

• Advertising (that conveys no evident information)
• Gambling (especially by people who also buy
  insurance)
• Taking (and avoiding) the wrong risks
• Helping the wrong victims
• Non-self-interested political preferences e.g.,
  why poor people support tax cuts for the rich
• Failure to reach agreement in negotiations
  e.g.,nasty divorces
• Self-control problems e.g., dieting, drug
  addiction, crimes of passion, failure to practice
  safe sex, etc..

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Affect once an integral part of economics (going
by the label, the passions.)
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"When we are about to act, the eagerness of
passion will seldom allow us to consider what we
are doing with the candour of an indifferent
person. This.. fatal weakness of mankind is the
source of half the disorders of human
life. Theory of Moral Sentiments
Adam Smith
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passions
Smiths specific perspective (close to many
contemporary dual process models in psychology)
Indulge!
Would an honorable man do it?
impartial spectator
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• Neoclassical economists aware of importance of
  affect

Human behavior, in general, and presumably,
therefore, also in the market place, is not under
the constant and detailed guidance of careful and
accurate hedonic calculations, but is the product
of an unstable and unrational complex of reflex
actions, impulses, instincts, habits, customs,
fashions and mob hysteria. In light of modern
psychology "let reason be your guide" is
apparently a counsel of unapproachable
perfection. Jacob Viner, 1925

• but deterred from incorporating it into economics
  due to its perceived complexity, as well as
  problem that affect could not be measured directly

I hesitate to say that men will ever have the
means of measuring directly the feelings of the
human heart. It is from the quantitative effects
of the feelings that we must estimate their
comparative amounts. W.S. Jevons, 1871
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A century later, we know a lot more about affect..

• Neuroscience methods
• Human
• brain lesions, accidents, lobotomies
• Brain imaging
• Animal
• Electrical brain stimulation
• Single-neuron measurement

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And economists have started to propose formal
models of affect

• Recent dual process models in economics
• Thaler Shefrin, 1981
• Bernheim Rangel, 2005
• Benhabib Bisin, 2002
• Fudenberg Levine, 2004

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My research (three thrusts)

• Empirical
• Affect has the capacity to turn us into virtually
  different people -- including on the dimensions
  that economists care most about
• People lack empathy for their own and others
  emotional states hot-cold empathy gaps
• Long-term decision-making is powerfully
  influenced in a non-normative fashion by
  transient emotional factors projection bias
  (Loewenstein, ODonoghue Rabin, QJE, 2003)
• Theoretical
• Model of affect/deliberation interactions

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Lerner, J. S., Small, D. A., and Loewenstein, G.
(2004). Heart strings and purse strings
Carry-over effects of emotions on economic
transactions. Psychological Science, 15(5),
337-41.
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• Life for the emotional is very different,
  comprised of dizzying revolutions of the clock,
  for what they want changes so rapidly that who
  they are is constantly in question If I went to
  bed one night loving Chloe are awoke the next
  morning hating her, then who was I?
• Alain de Botton, On
  Love

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My research (three thrusts)

• Empirical
• Affect has the capacity to turn us into virtually
  different people -- including on the dimensions
  that economists care most about
• People lack empathy for their own and others
  emotional states hot-cold empathy gaps
• Long-term decision-making is powerfully
  influenced in a non-normative fashion by
  transient emotional factors projection bias
  (Loewenstein, ODonoghue Rabin, QJE, 2003)
• Theoretical
• Model of affect/deliberation interactions

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Hot-cold empathy gapsDrug CravingLouis
Giordano, Warren K. Bickel, Eric A. Jacobs,
George Loewenstein, Lisa Marsch, and Gary J.
Badger.

• Procedure (simplified)
• n13 addicts receiving Buprenorphin (BUP)
  (methadone-like maintenance drug)
• chose between extra dose of BUP or different
  money amounts, either to be received 5 days later
  
• Made choice either right before receiving BUP
  (i.e., when deprived) or right after (when
  satiated)
• Prediction Addicts will value delayed BUP more
  highly if choosing when they are currently
  craving than when they are not currently craving

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Results
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The only trouble was the heat. The heat was
tremendous and nowhere in Rome was hotter than
Laura's apartment. She had been so eager to get
back into her own place that she had forgotten
how hot it would be. Heat is like that. In the
course of winter unbearable heat cools in memory
and becomes attractive, desirable. Now it was
terribly hot. Geoff Dyer (1997). Out of
Sheer Rage.
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My research (three thrusts)

• Empirical
• Affect has the capacity to turn us into virtually
  different people -- including on the dimensions
  that economists care most about
• People lack empathy for their own and others
  emotional states hot-cold empathy gaps
• Long-term decision-making is powerfully
  influenced in a non-normative fashion by
  transient emotional factors projection bias
  (Loewenstein, ODonoghue Rabin, QJE, 2003)
• Theoretical
• Model of affect/deliberation interactions

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• It is always thus, impelled by a state of mind
  which is destined not to last, that we make our
  irrevocable decisions.
• Marcel Proust, Remembrance of Things
  Past

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My research (three thrusts)

• Empirical
• Affect has the capacity to turn us into virtually
  different people -- including on the dimensions
  that economists care most about
• People lack empathy for their own and others
  emotional states hot-cold empathy gaps
• Long-term decision-making is powerfully
  influenced in a non-normative fashion by
  transient emotional factors projection bias
  (Loewenstein, ODonoghue Rabin, QJE, 2003)
• Theoretical
• Model of affect/deliberation interactions

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Central insight Affect is important, but humans
also have the ability to deliberate
systematically about the consequences of their
decisions
? Model needs to incorporate interaction of
affect and deliberation
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Goal of paper

• To formally model the role played by affect in
  human behavior and to trace out implications for
  economics specifically
• Intertemporal choice
• Decision under risk and uncertainty
• Interpersonal decision-making (e.g., bargaining,
  charity, etc.)

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Schematic representation of our model

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Schematic representation of our model

Proximity (e.g., Mischel et al. VanBoven et al.)
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Schematic representation of our model

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Schematic representation of our model

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Schematic representation of our model

?
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• Some notation
• x consumption
• s stimuli
• a(s) affective states induced by stimuli
• c(s) cognitive states induced by stimuli

Affective optimum (M stands for motivation)
Deliberative optimum
Proximity important source of xD ? xA
Utility cost of x ? xA
h(W,s)M(xA,a)M(x,a)
where, W willpower s factors that weaken or
bolster deliberative system -- e.g., stress
cognitive load h(.) cost of willpower
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Generates behavior somewhere in between the
deliberative optimum and the affective optimum,
depending on relative strength of the two systems
as captured by the cost of willpower h(W, s)
h(W,s)0 deliberative system in complete
control h(W,s)8 affective system in complete
control

• General modeling strategy
• Assume that U function is well-described by
  normative models (e.g., expected value,
  discounted utility, utilitarianism)
• Adapt assumptions about the M function from
  psychology research

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Ability to exert willpower also depends on prior
exertions of willpower (Baumeister et al.,
1999-2004).
willpower dynamics wt M(xtA,at)M(xt,at)
willpower exerted at time t Wt1 f(wt,Wt)
with f declining in w
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Three applications

• Intertemporal Choice
• Risk
• Social preferences

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• Intertemporal Choice
• Assume
• deliberative system cares equally about all
  outcomes
• affective system completely myopic

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intertemporal choice
Neural underpinnings of intertemporal choice
McClure, S.M., Laibson, D.I., Loewenstein, G.and
Cohen, J.D. (2004). Separate neural systems
value immediate and delayed monetary rewards.
Science, 304, 503-507
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Figure 1
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Figure 2
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Figure 3
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Figure 4
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Intertemporal choice conclusions

• hyperbolic time preference results from affective
  response to immediate outcomes
• hyperbolic time preferences temptation
  preferences extreme special cases of our model
  (reality probably lies in-between)
• model generates novel prediction that time
  preference will vary over time in response to
• willpower depletion
• cognitive load
• proximity of temptations

43
Shiv, B. and Fedorikhin, A. (1999), "Heart and
Mind in Conflict Interplay of Affect and
Cognition in Consumer Decision Making," Journal
of Consumer Research, Vol. 26 (December),
278-282.

• Cognitive/deliberative mental processing
  resources manipulated by having people keep a
  2-digit or 7-digit number in mind as they walk
  from one room to another
• On the way, subjects face choice between piece of
  cake or fruit-salad

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Risk

• Many examples of divergences between affective
  and deliberative evaluations of risks e.g.,
  flying versus driving

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• Shiv, B., Loewenstein, G., Bechara, A., Damasio,
  H., and Damasio, A. (2005), Investment Behavior
  and the Dark Side of Emotion, Psychological
  Science.

• Illustrates the (potentially negative) influence
  of affect on risky decision-making
• Subjects 15 patients with lesions in regions
  critical for emotional processing (amygdala,
  orbitofrontal, and insular/somatosensory cortex)
  15 normal controls, 7 patient controls with
  lesions in brain regions not associated with
  emotional processing
• Procedure
• Begin with 20 play 20 rounds of gambling task
• Each round Can put 1 at risk 50/50 chance of
  losing the 1 or getting 2.50 (e.v. of gambling
  is 1.25)

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Results gambling
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Normals responded to both winning and losing by
subsequently not gambling
Percent gambling conditional on action and
outcome of prior round
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Modeling risky decision-making

• Assume
• Deliberative system EV
• Affective system Weights all possible outcomes
  equally

• (ph)/(1Nh) p for p for p 1/N)
• s-shaped probability weighting small
  probabilities overweighted large probabilities
  underweighted
• Probability weighting more s-shaped for affective
  outcomes than for non-affective outcomes (Hsee
  Rottenstreich,2003 Ditto, Epstein Pizarro,
  forthcoming)
• Acting on ones cognitive appraisals of, as
  opposed to reflexively responding to emotional
  reactions to, risks, can require willpower

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Altruism

• Adam Smith
• Let us suppose that the great empire of China,
  with all its myriads of inhabitants, was suddenly
  swallowed up by an earthquake, and let us
  consider how a man of humanity in Europe, who had
  no sort of connection with that part of the
  world, would be affected upon receiving
  intelligence of this dreadful calamity. He
  would, I imagine, first of all express very
  strongly his sorrow for the misfortune of that
  unhappy people, he would make many melancholy
  reflections upon the precariousness of human
  life, and the vanity of all the labours of man,
  which could thus be annihilated in a moment And
  when all this fine philosophy was over, when all
  these humane sentiments had been once fairly
  expressed, he would pursue his business or his
  pleasure, take his repose or his diversion, with
  the same ease and tranquility as if no such
  accident had happened. The most frivolous
  disaster which could befall himself would
  occasion a more real disturbance. If he was to
  lose his little finger tomorrow, he would not
  sleep to-night but, provided he never saw them,
  he will snore with the most profound security
  over the ruin of a hundred millions of his
  brethren..

Why, then do people often behave humanely toward
others they dont know?
Smiths answer reason, principle, conscience,
the inhabitant of the breast, the man within, the
great judge and arbiter of our conduct i.e.,
the impartial spectator
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• We model altuism by assuming
• deliberative system evaluates outcomes based on
  utilitarianism with an extra weight on self
• affective system can deviate from that rule in
  either direction
• ?willpower(e.g., due to stress or load)? shift
  toward affective optimum

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Identifiability and altruism(study with Deborah
Small)

• Created Victims by first endowing each member
  of a group with 10 and then randomly selected
  half to lose their endowment.
• Each person who kept their 10 could contribute a
  portion of it to a victim who had lost his or
  hers.
• Identifiability manipulated by drawing number of
  the recipient before/after making helping
  decision.

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Results

• Additional studies
• Replicate effect in field (donations to Habitat
  for Humanity)
• Show effect is mediate by differential affective
  reactions
• Document analogous effect for punitiveness
  greater toward identifiable perpetrators
• Examine effect of learning about the effect

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Learning about Identifiability (Deborah Small,
with me and Paul Slovic)

• Statistical victims
• Automobile fatalities
• Organ donation waitlist
• Victims of war
• Risk prevention

Identifiable victims
Caring
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Possible?
Identifiable victims

• Statistical victims
• Automobile fatalities
• Organ donation waitlist
• Victims of war
• Risk prevention

Caring
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Statistical victim

• Food shortages in Malawi are affecting more than
  3 million children.
• More than 11 million people in Ethiopia need
  immediate food assistance.
• In Zambia, severe rainfall deficits have resulted
  in a 42 percent drop in maize production from
  2000. As a result, an estimated 3 million
  Zambians face hunger.
• Four million Angolans -- one third of the
  population -- have been forced to flee their
  homes.

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Identifiable victim
Meet Rokia, a 7-year-old girl from Mali, Africa.
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Method

• 2 (stat./ident.) X 2 (Teach/no teach)
• between subjects design
• 119 participants filled out (unrelated) survey
  for 5
• Save the Children charity request
• Ecologically-valid presentation

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Teaching identifiability

• First, before we ask you to decide about how
  much, if any, of your earnings to donate, we'd
  like to tell you about some research conducted by
  social scientists. This research shows that
  people typically react more strongly to specific
  people who have problems than to statistics about
  people with problems.

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Mean Donation
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Priming affect versus deliberation

• N 146 people on university campus received 5
  dollar bills for participating
• Affective versus deliberative decision making
  manipulated (Hsee Rottenstreich, 2004)
• Half first asked a series of questions that
  involved calculations e.g., If an object
  travels at five feet per minute, then how many
  feet will it travel in 360 seconds?
• Half asked series of questions that involved
  feelings e.g., When you hear the name George
  W. Bush, what do you feel?
• Given opportunity to donate part or all of 5 to
  either an identifiable victim or statistical
  victims

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Identifiable victims

• Statistical victims
• Automobile fatalities
• Organ donation waitlist
• Victims of war
• Risk prevention

Caring
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• LIntransigeant, 1922
• An American scientist announces that the world
  will end If this prediction were confirmed,
  what do you think would be its effects on people
  between the time when they acquired the
  aforementioned certainty and the moment of
  cataclysm?

• Marcel Prousts response
• I think that life would suddenly seem wonderful
  to us if we were threatened to die. Just think
  of how many projects, travels, love affairs,
  studies, it our life hides from us, made
  invisible by our laziness which, certainty of a
  future, delays incessantly.
• But let all this threaten to become impossible
  for ever, how beautiful it would become again!
• The cataclysm doesnt happen, we dont do any of
  it, because we find ourselves back in the heart
  of normal life, where negligence deadens desire.
  And yet we shouldnt have needed the cataclysm to
  live life today. It should have been enough to
  think that we are humans, and that death may come
  this evening.