Behavioural Foundations of Economics
In recent years, work on what may broadly be described as 'behavioural economics' has expanded rapidly, and is now attracting the attention of leading figures in economics, such as Kenneth Arrow. Much of the work, however, has concentrated on particular a
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By the same author SOCIAL AND PSYCHOLOGICAL FOUNDATIONS OF ECONOMIC ANALYSIS
Behavioural
Foundations of
Economics
J. L. Baxter
Senior Lecturer in Economics Sheffield University Manogement School
3 points will he regard one applicant as more intelligent than another. If the difference in scores between two candidates is < 3 points, therefore. the candidates will be judged equally intelligent. and the more experienced of the two will then be selected. The same process may be used for further attributes if one alternative still does not emerge a clear favourite. This method of selection. as the example suggests. is especially appropriate where the relevant dimension is 'noisy', i.e .• not subject to precise measurement. It is also worth noting that the lexicographic semiorder rule may be used to demonstrate intransitivity in choices - as Tversky (1969) shows. In a later study. Tversky (1972) proposed another sequential elimination rule which he described as 'elimination by aspects'. Aspects, or attributes, are assumed to have differing weights. and one alternative is then chosen with a probability proportional to its weight. All alternatives not having better values than the selected attribute are eliminated. A second attribute is then selected. again with probability proportional to its weight. and the process is repeated. The assumption is that one alternative will eventually emerge as the clear winner.
The Individual Decision-Making Process
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Earl (1980) proposed a development of what he referred to as the 'behavioural lexicographic model'. People are assumed not only to rank attributes, or characteristics, according to their priorities but to set targets for the attributes. This enables the decision maker to avoid considering trade-offs between characteristics, and to attempt independently to pursue as many characteristic goals as possible. If decision makers run out of relevant attributes before filtering out all but one scheme, they can always resolve the choice problem by using the criterion of cheapness (where it is a relevant consideration) to choose the course of action expected to perform best in respect of the lowest dimension, or search for other relevant attributes which might be taken into consideration. This type of lexicographic model is developed further in Earl (1983).
Heuristics under conditions of uncertainty The heuristics discussed above do not specifically tackle the problems of decision taking under conditions of uncertainty. A substantial body of research work has concerned itself, however, with the behaviour of individuals faced with such circumstances. The findings, as we noted earlier, add weight to the criticisms of the expected utility model. The results of the studies are surveyed in Kahneman et al. (1982). In sum, the studies show that, in order to cope with the uncertainty surrounding decision-making, individuals resort to a variety of heuristics, the most common of which are: representativeness; availability; and anchoring. Furthermore, the use of these heuristics lea