Behavioral Economics of Preferences, Choices, and Happiness

717 Pages·2016·9.61 MB·English

by  Shinsuke Ikeda

Shinsuke Ikeda · Hideaki Kiyoshi Kato
Fumio Ohtake · Yoshiro Tsutsui Editors
Behavioral
Economics of
Preferences,
Choices, and
Happiness
Behavioral Economics of Preferences, Choices,
and Happiness

Shinsuke Ikeda • Hideaki Kiyoshi Kato
Fumio Ohtake • Yoshiro Tsutsui
Editors
Behavioral Economics
of Preferences, Choices,
and Happiness
123
Editors
ShinsukeIkeda HideakiKiyoshiKato
InstituteofSocialandEconomicResearch GraduateSchoolofEconomics
OsakaUniversity NagoyaUniversity
Ibaraki,Osaka,Japan Nagoya,Aichi,Japan
FumioOhtake YoshiroTsutsui
InstituteofSocialandEconomicResearch FacultyofEconomics
OsakaUniversity KonanUniversity
Ibaraki,Osaka,Japan Kobe,Hyogo,Japan
ISBN978-4-431-55401-1 ISBN978-4-431-55402-8 (eBook)
DOI10.1007/978-4-431-55402-8
LibraryofCongressControlNumber:2015942514
SpringerTokyoHeidelbergNewYorkDordrechtLondon
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Preface
This bookaims to providenew and broaderdirectionsfor the future development
ofbehavioraleconomicsandfinance.Todoso, wecollectimportantcontributions
in behavioral economics/finance and related topics from journal publications of
Japaneseresearcherstodate.
All four editors of this book have been interested in extending the reach of
standardtheoriesintheirownfieldsusingbehavioraleconomics.A projecttoedit
some sort of readings or handbooks on behavioral economics for the promotion
ofeconomicresearchcame aboutnaturallyas a resultof ourfrequentinteractions
whilerunningacademicmeetingsonbehavioraleconomics,especiallythoseofthe
AssociationofBehavioralEconomicsandFinance(ABEF),theJapaneseEconomic
Association (JEA), andthe NipponFinanceAssociation (NFA). In addition,these
meetings gave us access to important works that were motivated by behavioral
economics.Wethereforehavecompiledandeditedacoupleofindependentvolumes
inanattempttocapturethemanyworthyarticlesthatliewithinthistopic.Thefirst,
titled Behavioral Economics of Preferences, Choices, and Happiness, focuses on
worksonbehavioraleconomics;andthesecond,BehavioralInteractions,Markets,
andEconomicDynamics:TopicsinBehavioralEconomics,oneconomics-oriented
studiesontopicsinbehavioraleconomics.Thisbookistheformer.
Thepresentbookcanbecharacterizedbythreespecificfeatures.First,itfocuses
on single-agent behavioral issues such as decision making, preference formation,
andsubjectivewell-being.Thesetopicscomprisethecoreofbehavioraleconomics,
at least at present. In contrast, the other book focuses on economic studies that
examine interactions of multiple agents or market phenomena through the use of
behavioraleconomicsmodels.Thetwobooksthusarecomplementary.
Second, the chapter authors have added newly written addenda to the original
articles,inwhichtheydiscusstheirownsubsequentworksandprovidesupplemen-
tary analyses, detailed informationon the underlyingdata, and/orrecentliterature
surveys.TheaddendumofeachchapterisbasedondiscussionattheDevelopment
of BehavioralEconomicsand Finance Conference held in February 2014.During
thisconference,participants,includingtheauthorsofthebookchapters,discussed
the original studies to be included in these volumes in light of contributions,
v
vi Preface
limitations, and implications for future research developments. We accordingly
believe that this work creates a bridge between the original studies and future
researchdevelopment.
Third, reflecting the diverse fields of the editors, this book, as well as its
companion volume, captures the broad influence of behavioral economics and
finance on various topics. The topics of this book cover time preference and risk
attitudes,addiction,health,socialpreferences,happiness,varioustypesofdecisions,
biologicalfoundations,andinvestorbehavior.
Part I collects six studies concerning attitudes toward risk and time, which
is one of the main topics of behavioral economics. It starts with an article that
appeared in the American Economic Review and was authored by Professors
TomomiTanaka, Colin F. Camerer,and Quang Nguyen.This chapteris uniquein
thatitmeasuresriskandtimepreferencesbyconductingexperimentsinVietnamese
villages. Itinvestigateshow wealth, politicalhistory,and economiccircumstances
arecorrelatedwithriskandtimediscounting.Theirmainfindingisthatpeopleare
less loss-averseandmorepatientin villageswith highermean income.Chapter2,
authored by Professors Takanori Ida and Rei Goto, has two characteristics. First,
it develops a new method to simultaneously measure the rate of time preference
and the coefficientof risk aversion. Since time preference is usually measured by
assuming a linear utility function, resulting in estimates that are biased, this is
animportantcontribution.Second,itinvestigatesrelationshipsbetweenpreference
parametersandcigarettesmoking.Theauthorsfindthatcurrentsmokersare more
impatientandrisk-pronethannonsmokers.Chapter3,writtenbyProfessorsYusuke
Kinari,FumioOhtake,andYoshiroTsutsui,measurespresentbias, payingspecial
attentiontotheseparationofdelayandintervaleffects.Thisconstitutesanimportant
contributionbecausemostofthepreviousstudiesdidnotseparatethem.Theyfind
thatpresentbiastranspireswhendelayislessthan8weeks.Theyalsofindthatthe
interval and magnitude effects are a result of intertemporalchoice being partially
basedonthedifferentialinrewardamount.Chapter4,byProfessorKanTakeuchi,
analyzesnotonlythepresentbias,butalsofuturebiasusinglaboratoryexperiments.
Futurebiasmeansthatsubjectstendtoundervaluetheimmediatereward,whichis
the opposite of present bias. Although present bias has been frequently reported,
this chapter is unique in reporting that many subjects exhibit future bias, and in
proposing an inverse S-curve time discount function to capture this bias. It also
presents a new non-parametric model of time preference that assumes neither
separabilitybetweendelayandrewardnoranyspecificformoftheutilityfunction.
Chapter 5, by Professor Taiki Takahashi, proposes that hyperbolic discounting,
whichisoftenobservedinbiology,psychopharmacology,behavioralneuroscience,
and neuroeconomics in humans and non-human animals, can be explained by
Weber’slaw.Weber’slawstatesthattheexternalstimulus(e.g.,loudness)isscaled
into a logarithmic internal representation of sensation. This chapter demonstrates
thatevenifsubjectsdiscountdelayedrewardsexponentially,theiractualdiscounting
of delayed rewards may follow the hyperbolic function. This chapter is unique
in querying the reason why people exhibit hyperbolic discounting. Chapter 6, by
Professors Shunichiro Sasaki, Shiyu Xie, Fumio Ohtake, Jie Qin, and Yoshiro
Preface vii
Tsutsui, investigatesrisk attitudes of Chinese students by conductinga laboratory
economicexperimentofsellingandbuyinglotteriesinFudanUniversity,Shanghai.
Theyfindthatsubjectsinthesellingexperimentwererisklovingwhentherewasa
lowwinprobabilityandriskaverseunderahighwinprobability,whereastheywere
riskaversewithanywinprobabilityinthebuyingexperiment.Theyinvestigatehow
riskattituderelatestotheattributesofthesubject.Theyalsofindthatsubjects’risk
attitudesrevealedintheexperimentscanaccountfortheirriskyassetholding.
Part II collects five studies that relate to smoking (or addiction). As four of
these studies investigate the effect of smoking on time discounting, Part II has a
deep connection to Part I. Chapter 7 was written by Professors Takanori Ida and
Rei Goto. This chapter presents the results of a survey conductedin 2006 of four
addictivebehaviors:smoking,drinking,pachinko(apopularJapaneseformofpin-
ballgambling),andhorse-racebetting.Thischapterprovidesauniqueperspective
ontheinterdependenciesamongthe fouraddictivebehaviorsandfindsthathighly
significant interdependencies exist between smoking and drinking and between
pachinko and horse-race betting. This finding suggests that quitting one addictive
behaviorisnotsufficientforcompletelyescapingfromaddiction.Onemoremeritof
thisstudyisthatitestimatestimediscountingandriskaversionsimultaneously,asis
doneinChap.2.Chapter8waswrittenbyProfessorsYuOhmura,TaikiTakahashi,
and Nozomi Kitamura and investigates the effect of smoking on delay effect. In
an experiment using 27 smokers and 23 never smokers, the subjects are required
tochoosebetweenimmediateanddelayedmonetaryrewards.Theauthorsfindthat
thedegreetowhichdelayedmonetarygainswerediscountedwassignificantlyand
positively correlated with both the number of cigarettes smoked, indicating that
the frequency of nicotine self-administration is positively associated with greater
delay discounting of gain. Chapter 9 was written by Professors Myong-Il Kang
andShinsukeIkedaandinvestigatestheeffectofsmokingondelayandsigneffect
using a nationwide panel survey of Japanese adults, the Japan Household Panel
SurveyonConsumerPreferencesandSatisfaction.Theydividetherespondentsinto
naïve and sophisticated people and categorize them by smoking participation and
cigarette consumption. They find that (1) discount rates are positively associated
with both the probability of smoking participation and the number of cigarettes
consumed,(2)thesigneffectrestrainsbothtypesofsmokingbehavior,and(3)the
degreeofhyperbolicdiscountingpositivelyrelatestobothdecisions.Chapter10was
authoredbyProfessorsShokoYamane,HiroyasuYoneda,TaikiTakahashi,Yoshio
Kamijo, Yasuhiro Komori, Fumihiko Hiruma, and Yoshiro Tsutsui. This study is
unique in that the authorscompare time discountrates not only between smokers
and non-smokers but also between smokers and deprived smokers. Additionally,
subjects receive not only monetary rewards but also actual tobacco in order to
elicit smokers’ true preferences. They find that smokers are more impatient than
non-smokers and that nicotine deprivation makes smokers even more impatient,
suggestingthatnicotineconcentrationhasdifferenteffectsonshort-runandlong-run
timepreferences.Chapter11waswrittenbyProfessorEijiYamamura.Thischapter
differsfromtheothersinthatitdoesnotexaminetherelationshipbetweensmoking
andtime discounting,butinstead examinesthe effectof socialnormson cigarette
viii Preface
consumption.Usingprefecture-levelpaneldata,theauthorfindsthata tightlyknit
societyresultsin areductioninsmoking.He alsofindsthatsmokinganddrinking
haveacomplementaryrelationship.Thatis,agreaterinitialconsumptionofalcohol
resultsinalargerconsumptionofcigarettes.Thisfindingisconsistentwiththatin
Chap.7.
Part III is composed of two chapters that address health-related behaviors. In
Chap. 12, Professors Shinsuke Ikeda, Myong-Il Kang, and Fumio Ohtake use
nationwide survey data to examine how the Japanese people’s body weights are
related to their personal traits captured by time discounting. Their unique contri-
butionisthatanassociationbetweentimediscountingandbodyweightisdetected
not only via impatience, but also via preference time-inconsistency, captured by
hyperbolicdiscounting,andtheagain-lossasymmetryoftimediscounting,captured
by the sign effect. Body weight is found to be positively associated with survey
responsesindicativeofimpatienceandhyperbolicdiscounting,whereasnegatively
associatedwiththoseindicativeofthesigneffect.Thefindingimpliesthatobesity
andunderweightatleastpartiallycomefromtemporaldecisionbiases.InChap.13,
ProfessorsYoshiroTsutsui,UriBenzion,andShoshShahrabaniaddresseconomic
and behavioral determinants of Japanese people’s decisions to receive influenza
vaccinations.Based ona large-scalequestionnaire,decisionsareshownto depend
notonly onfactorsthatare predictablefromrationaldecision models,suchas the
cost and benefits of the vaccination, infection risk, severity of the disease, side
effects, and the attitudes toward time and risks, but also on behavioraltendencies
due to status-quo bias, overconfidence,and altruism. Policy implications are also
discussed, especially regarding the effectiveness of disseminating related medical
information.
The two chapters of Part IV address social aspects of consumer preferences.
In Chap. 14, Professors Katsunori Yamada and Masayuki Sato estimate income
comparison effects using the decision utility approach instead of the standard
experiencedutilityapproach,inwhichsubjectsstatepreferencesovercombinations
ofhypotheticalincomeamountsforthemselvesandcertainreferencepersons.The
authors conduct hypothetical discrete choice experiments in an original, large-
scale, Internet-based survey of Japanese subjects to estimate the utility function
parametersfortheintensityandsignoftheincomecomparisons.Theyfindthatthe
incomecomparisoneffectsdependonthecharacteristicsofthesubjectsthemselves
and their reference persons. In the addendum, Yamada and Sato show that their
estimates of the preference parameters were quite stable after the Great East
Japan Earthquake. Social aspects of consumer preferences may well depend on
how frequently people interact in society. In Chap. 15, Professor Eiji Yamamura
measures the amounts of social capital in prefectures by the average rates of
participation in local community activities to estimate the relationship between
socialcapitalandpreferencesforincomeredistribution.Peopleinareaswithgreater
social capital are found to be more likely to prefer income redistribution. The
addendum summarizes further developments with respect to the effect of trust in
thegovernmentonredistributionpreferencesandperceptionoftaxburden.
Preface ix
PartVcollectsthreearticlesconcerninghappinessandwell-being.InChap.16,
ProfessorsYoshiroTsutsui,MilesKimball,andFumioOhtakeanalyzehowelection
results make some voters happy and others unhappy. Using monthly survey data,
theyexaminethegeneralelectionconductedonSeptember11,2005,inwhichPrime
MinisterKoizumiwonalandslidevictory.Althoughthereareconsistenttendencies
that supporters of ruling parties are happier and supporters of opposition parties
are less happy, the effect is not significant. From this result they conclude that
theJapanesepeopleare indifferenttopoliticscomparedwith peopleinthe United
States. Chapter 17 was written by Professors Yoshiro Tsutsui and Fumio Ohtake,
who ask why the level of happiness is constant over time, which is known as the
Easterlinparadox.Theirhypothesisisthatthemannerinwhichthequestionisasked
maybeoneofthecausesoftheparadox.Thus,theyaskaboutchangesinhappiness
intheirdailysurveyandinvestigatewhetherthelevelofhappinessandtheintegrated
processofchangesinhappinessarethesame.Theyfindthatthelevelofhappinessis
stationary,whereastheintegratedprocessofchangesisnon-stationarywitharising
trend,implyingthattheyaredifferentseries.Thisresultisinterestingbecauseifwe
usetheintegratedprocessofchangeinhappinessratherthanthelevelofhappiness,
the Easterlin paradox would probably not be observed. Chapter 18, written by
ProfessorsHiroshiOnoandKristenSchultzLee,proposesaninnovativeconceptof
happinessredistribution.Usingdataon42,000individualsfrom29countries,they
findthataggregatehappinessisnotgreaterinsocialdemocraticwelfarestates,but
thathappinesscloselyreflectstheredistributionofresourcesinthesecountries.For
example,theyfindthatthehappinessgapbetweenhigh-andlow-incomeearnersis
considerablysmallerinsocialdemocraticwelfarestates,suggestingthathappiness
is redistributedfromthe privilegedto the less privileged.Theiridea isuniqueand
hasseldombeenanalyzedinthehappinessliterature.
PartVIcollectstheoreticalcontributionsonchoicesanddecisions.InChap.19,
ProfessorsYusufcanMasatlioglu,Daisuke Nakajima,and ErkutY. Ozbaydevelop
a new theory of revealed attention to show how to deduce a decision maker’s
preferencesandthealternativeshepaysattentiontogivenhisobservedchoices.The
study,originallypublishedintheAmericanEconomicReview,isaunique,important
contributionthatfundamentallyrevisesthe standardrevealedpreferencetheoryso
as to make it applicable to more general and plausible cases in which decision
makers pay only limited attention to their potentially feasible choice set. The
criticalimportanceofdistinguishingapreferenceand(in)attentioninunderstanding
a decision maker’s observed behavior is clarified, thereby revealing policy and
welfare implications. The limited attention theory is also shown to be capable
of explaining the often observed “anomalous” behaviors, such as attraction effect
and cyclical choice. In Chap. 20, Professors Youichiro Higashi, Kazuya Hyogo,
and Norio Takeoka contribute to the literature of intertemporal decision making.
Their study provides an axiomatic foundation for the random discounting model,
where the decision maker believes her discount factor fluctuates randomly over
time.Thedegreeofuncertaintyaboutfuturediscountfactors,measuredbysecond-
order stochastic dominance, is characterized in terms of behavioral preference
for flexibility. A consumption-savings problem under random discounting is also