Animal Spirits Affective and Deliberative Processes in Economic

Animal Spirits Affective and Deliberative Processes in Economic Behavior George Loewenstein & Ted O’Donoghue

Ed Lazear, "Economic Imperialism" Economic Journal, 2000. • • • law political science history Demography …. . "individuals engage in maximizing rational behavior" • • • • spending/saving insurance labor market behavior bargaining investing medical decision making gambling criminal behavior fertility/sex charity/altruism dieting addiction suicide

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)

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

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

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’s response: “You have stated the gist of the matter in your letter--and taken the wind out of my sails!

And, another expert’s 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

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. .

Affect once an integral part of economics (going by the label, ‘the passions. ’)

"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

Smith’s specific perspective (close to many contemporary ‘dual process’ models in psychology) Indulge! Would an honorable man do it? passions “impartial spectator”

• 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

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

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

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, O’Donoghue & Rabin, QJE, 2003) Theoretical: Model of affect/deliberation interactions

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.

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

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, O’Donoghue & Rabin, QJE, 2003) Theoretical: Model of affect/deliberation interactions

Hot-cold empathy gaps Drug Craving Louis Giordano, Warren K. Bickel, Eric A. Jacobs, George Loewenstein, Lisa Marsch, and Gary J. Badger. Procedure (simplified): • n=13 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

Results

“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.

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, O’Donoghue & Rabin, QJE, 2003) Theoretical: Model of affect/deliberation interactions

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

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, O’Donoghue & Rabin, QJE, 2003) Theoretical: Model of affect/deliberation interactions

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

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. )

Schematic representation of our model

Schematic representation of our model Proximity (e. g. , Mischel et al. ; Van. Boven et al. )

Schematic representation of our model

Schematic representation of our model ?

Some notation: • x • s • a(s) • c(s) consumption stimuli affective states induced by stimuli cognitive states induced by stimuli Affective optimum (M stands for ‘motivation’): Deliberative optimum: Proximity: important source of x. D ≠ x. A Utility cost of x ≠ x. A: h(W, σ)*[M(x. A, a)–M(x, a)] where, W willpower σ factors that weaken or bolster deliberative system -- e. g. , stress & cognitive load h(. ) cost of willpower

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, σ)=0 deliberative system in complete control h(W, σ)=∞ 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

Ability to exert willpower also depends on prior exertions of willpower (Baumeister et al. , 19992004). willpower dynamics: wt ≡M(xt. A, at)–M(xt, at) willpower exerted at time t Wt+1 = f(wt, Wt) with f declining in w

Three applications • Intertemporal Choice • Risk • Social preferences

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

intertemporal choice Neural underpinnings of intertemporal choice Free 2 s Mc. Clure, 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 12 s

A MPFC PCC VStr MOFC 10 T 13 0 x = 4 mm % Signal Change B y = 8 mm VStr 0. 4 MOFC MPFC PCC 0. 2 0. 0 -0. 2 -4 0 4 Time (s) 8 d = Today Figure 1 z = -4 mm d = 2 weeks d = 1 month

A B VCtx 1. 2 PMA RPar DLPFC VLPFC LOFC d = Today d = 2 weeks LOFC x = 44 mm 0. 8 0. 4 0. 0 -4 PMA VCtx % Signal Change DLPFC RPar 0 4 Time (s) 8 SMA x = 0 mm 0 Figure 2 T 13 10 d = 1 month

A B 75% RT (s) P(choose early) 100% 50% 4. 0 3. 5 3. 0 25% 0% 1 -3% 5 -25% 2. 5 35 -50% R’ vs. R C 1. 2 % Signal Change 4. 5 VCtx Easy Difficult Decision PMA RPar VLPFC LOFC 0. 8 0. 4 0. 0 -4 0 4 Time (s) DLPFC 8 Difficult Easy Figure 3

Normalized Signal Change 0. 05 d areas 0. 0 b areas -0. 05 Choose Early Figure 4 Choose Late

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

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 Processing resources High (2 digit #) Low (7 digit #) % choosing cake 37% 59%

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

• 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 decisionmaking • 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)

Results: % gambling

Normals responded to both winning and losing by subsequently not gambling Percent gambling conditional on action and outcome of prior round Action/ outcome didn't invest (a) emotion deficit Patients (b) normal controls (c) patient controls significance of difference 74. 2% 70. 2% 63. 4% n. s. invested and 84. 0% won 61. 4% 75% p<. 02 (a vs. b) p<. 16 (a vs. c) invested and 85. 2% lost 46. 9% 37. 1% p<. 005 (a vs. b) p<. 006 (a vs. c) $25. 70 $23. 40 $20. 07 p<. 11 p<. 006 earnings

Modeling risky decision-making Assume: • Deliberative system: EV • Affective system: Weights all possible outcomes equally • (p+h)/(1+Nh) > p for p < 1/N and (p+h)/(1+Nh) < 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 nonaffective outcomes (Hsee & Rottenstreich, 2003; Ditto, Epstein & Pizarro, forthcoming) Acting on one’s cognitive appraisals of, as opposed to reflexively responding to emotional reactions to, risks, can require willpower

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 don’t know? Smith’s 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

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

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.

Results N Mean amount given Median amount given 37 $2. 12 $1. 81 39 $3. 42 $3. 81 Condition Undetermined (Draw # after) Determined (Draw # before) 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

Learning about Identifiability (Deborah Small, with me and Paul Slovic) Statistical victims • Automobile fatalities • Organ donation waitlist • Victims of war • Risk prevention Identifiable victims Car ing

Possible? Identifiable victims Statistical victims • Automobile fatalities • Organ donation waitlist • Victims of war • Risk prevention Caring

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.

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

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

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…. ”

Mean Donation

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

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

L’Intransigeant, 1922 Marcel Proust’s response: “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? “ “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 doesn’t happen, we don’t do any of it, because we find ourselves back in the heart of normal life, where negligence deadens desire. And yet we shouldn’t 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. ”