Economic decisions under group pressure and on intuition

24 October 2018

Do people in groups make decisions other than individually and what is the value of intuition in solving complex problems? These are questions from the fast-growing field of behavioural economics that Stephen Jagau answers in his thesis.

Give someone a large number, say to remember this number and let this person carry out a complex assignment at the same time. It is one of the many behavioural economic experiments that Stephan Jagau has studied in recent years as a PhD student at the Amsterdam School of Economics (ASE). In this case, having to remember the number means that the subject does not pay full attention to the actual assignment. It is a means of distinguishing an 'intuitive' decision from a well-considered one.

Jagau obtained his PhD on 12 October with his thesis 'Listen to the Sirens; Understanding Psychological Mechanisms with Theory and Experimental Tests'. The three topics covered in it fall under what is nowadays called behavioural economics; combining psychological and emotional elements in making economic decisions. Experimentation and the use of mathematical models from game theory, among others, is an essential part of this science, which emerged in the seventies and has become widely known by Nobel Prize winners such as Daniel Kahneman and Richard Thaler.

Rubicon

Jagau (28), from Germany, obtained a bachelor's degree in 'management, philosophy and economics' in Frankfurt. In the meantime he became interested in a more mathematical approach, and continued his studies with a two-year research master at the Tinbergen Institute in Amsterdam, which he completed cum laude. His subsequent doctoral degree was completed in three years.

In July Jagau was selected for the Rubicon programme to do research abroad. For the next three years Jagau will work as a postdoctoral researcher at the universities of Zurich and California. For this programme, funded by the Netherlands Organisation for Scientific Research (NWO), 20 researchers were selected from 88 candidates, including 3 from the University of Amsterdam (UvA).

Rational versus limited

Jagau is a practitioner of behavioural economics. This direction more or less stems from criticism of the neoclassical thinking that dominated economic science in the last century. One of the starting points of the neoclassical theory is that economic actors are fully rational and use all available information in their decisions. Behaviour economists, however, assume limited rationality and believe that actors, whether systematic or not, are highly influenced by psychological and emotional factors.

From classical theory, the new behaviour economists were critically regarded for a long time. This is partly because a clear theoretical framework is still lacking,' says Jagau. Although there are many experiments that show that emotions play a major role in economic decision-making, this does not mean that clear systematic knowledge follows from this. Within the UvA, Jagau observes, the hatchet has long since been buried among micro-economists - which Jagau himself is. Among macroeconomists, controversy is still present.

Axioms

It is no coincidence that Jagau's research abroad in the coming years will mainly focus on theorising. It is important to first find the axioms and then carry out experiments, so that you can better identify what you are looking for and how experiments with certain psychological and emotional factors can possibly be supplemented. It is also important to determine which factors are not useful.

According to Jagau, there is no doubt that behavioural economics will ultimately be a fully-fledged and useful science. The behavioural economy has enormous potential. “A lot is happening around me which is heading in the same direction. Moreover, behavioural economics has the momentum. The possibilities for empirical research are increasing rapidly. Previously, economists who wanted to measure behaviour were limited to conducting surveys. Nowadays we have enormous external data and new data from field experiments, while neurology, for example, also makes a contribution by measuring certain brain activity”, says Jagau. “This gives us the opportunity to formulate better and more plausible theories in which behavioural factors are interwoven”.

Individual and group

For his dissertation, Jagau investigated a variety of aspects including the behaviour of the individual within a group. Experiments show that the decision that someone makes as an individual can be different from when someone is part of a group. It may be that this person as an individual takes more or less risk. Jagau set up experiments for this purpose in the form of a lottery - a common set-up within the behavioural economy - in which, for example, the choice has to be made between the profit at 20 euros and the loss of 10 euros, both with a certain probability. Each person always made a choice first for himself and then one within the group.

“Both choices are usually consistent”, says Jagau, “but in 30% of the cases this is not the case. It turns out that it has a great effect when an individual has information about the choice of others in the group. People have a desire to conform to the wishes of the majority. It also has an influence when an individual is made responsible for the choice of the whole group”. Jagau carried out his experiments within CREED (Center for Research in Experimental Economics and Political Decision-making), part of the UvA.

Prisoner's dilemma

Jagau also used research that is based on game theory elements and in which subjects are presented with a 'prisoners dilemma' and are faced with the question of whether they want to work with someone. “Sometimes the choices have to be made under time pressure or the subjects are distracted, for example because they have to remember a large number. People make different choices when they have to decide quickly compared to when they are given time to think about a dilemma. We measure in which situation it is better to trust intuitively and when it is better to wait first. This can be important if you are in an environment where you have to incur costs to determine whether your potential partners are cooperative”.

 

By Bendert Zevenbergen

Published by  Economics and Business