Table Of ContentPSYCHOLOGY IN ECONOMICS AND BUSINESS
Psychology in Economics
and Business
An Introduction to Economic Psychology
by
GERRIT ANTONIDES
With an Introduction by W. Fred van Raaij
Second, Revised Edition
KLUWER ACADEMIC PUBLISHERS
DORDRECHT/BOSTON/LONDON
Library of Congress Cataloging-in-Publication Data
Antonides. Gerr1t. 1951-
Psychology in economics and business: an introduction to economiC
psychology I by Gerrit Antonides : with an introduction by W. Fred
va~ Raaij.
p. cm.
Inc 1u des index.
1. Economics--Psychological aspects. 1. Title.
HB74.P8A64 1996
330' .01' 9--dc20 96-19922
ISBN-13: 978-0-7923-4108-6 e-ISBN-13: 978-94-009-1710-1
DOl: 10.1 007/978-94-009-1710-1
Published by Kluwer Academic Publishers,
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Cover picture has been adapted from F. J. Gall and G. S. Spurzheim (18\0) in D. Krech et al.:
Elements of Psychology. Copyright @1982 by Alfred A. Knopf.
Reproduced by permission of McGraw-Hill, Inc.
The idea expressed in the cover picture is that different kinds of behavior are controlled by
separate parts of the brain. This hypothesis in phrenology is not assumed here but we assume
that mental processes are involved in economic and social behavior as considered in this book.
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CONTENTS
PREFACE IX
1. INTRODUCTION
(by W. Fred van Raaij)
PART I
AN ECONOMIC PSYCHOLOGICAL PARADIGM
2. ECONOMICS AND PSYCHOLOGY 9
2.1. Shared interests of economics and psychology 9
2.2. Economic actions in everyday life 11
2.3. Relevance of psychology for economics 13
2.4. Economic psychological models of behavior 15
Box 2.1. Mental economics 21
3. MOTIVATION AND PERSONALITY 25
3.1. The function of motivation and personality in
economic behavior 25
3.2. Need for achievement 28
3.3. Locus of control 33
3.4. Sensation seeking and risk attitude 35
3.5. Altruism 39
3.6. Time preference 42
3.7. Cognitive Style 45
3.8. Life-style 48
Box 3.1. Lee Iacocca 51
4. PERCEPTION 55
4.1. Psychophysics 55
Box 4.1. A psychophysical classroom experiment 59
4.2. Perceptual judgment 60
4.3. Price perception 64
4.4. Perception of money and inflation 66
v
VI CONTENTS
4.5. Perception of economic activities and resources 69
4.6. Risk perception 73
Appendix 76
5. LEARNING 79
5.1. Introduction 79
5.2. Classical conditioning 80
5.3. Operant conditioning 83
504. Other types of learning 90
5.5. Economic socialization 92
5.6. A conflict model of buying behavior 94
Box 5.1. Token economy 98
6. ATTITUDE 101
6.1. Development of the attitude concept 101
6.2. Attitude and utility 105
6.3. Issues in attitude research 107
Box 6.1. Simplified choice in an information display 115
604. Images 117
6.5. The relation between attitudes and behavior 120
Box 6.2. Attitudes versus actions 123
7. LIMITED INFORMATION PROCESSING 127
7.1. Information processing in consumer decision making 127
7.2. Information processing capacity 129
Box 7.1. An inefficiency of short -term memory 133
7.3. Heuristics in information processing 135
Box 7.2. How to play better tennis? 140
7 A. Aspiration levels in information processing 143
7.5. Models of information processing 145
Box 7.3. Computer assisted decision making 150
8. ECONOMIC EXPECTATIONS AND INVESTMENT BEHAVIOR 154
8.1. Buying intentions 154
8.2. Expectations 156
8.3. Consumer confidence 157
804. Expectations regarding investments 162
8.5. Ethical investments 166
8.6. Initial public offerings 168
9. EMOTIONS 171
CONTENTS Vll
9.1. Introduction 171
9.2. Theories of emotion 174
9.3. Emotions and the utility function 179
904. Emotions and consumer choice 181
Box 9.1. Emotions in advertising 186
10. WELL-BEING 190
10.1. Introduction 190
10.2. Subjective well-being 197
10.3. Well-being and income 200
lOA. Poverty 206
10.5. Unemployment 208
10.6. Consumer satisfaction 210
PART II
INFORMATION PROCESSING IN A WIDER SENSE
11. COGNITIVE CONSISTENCY 219
11.1. Introduction 219
11.2. Cognitive dissonance 221
11.3. Attribution theory 227
1104. Social judgment 234
Box 11.1. Attribution of political messages 240
12. RATIONALITY 245
12.1. Introduction 245
12.2. Axioms of economic choice 247
12.3. The shape of the value function 250
1204. Endowment effect 251
12.5. Mental accounting 253
12.6. Status quo bias 257
12.7. Sunk costs 258
12.8. Self-control 259
Box 12.1. A thought experiment on the endowment effect 265
13. CHOICE UNDER UNCERTAINTY 268
13.1. Expected utility 268
13.2. The certainty effect 270
13.3. The reflection effect 274
1304. The framing effect 275
13.5. Simplification in risky choice 279
viii CONTENTS
Box 13.1. The St. Petersburg paradox 282
14. GAME THEORY 286
14.1. The Prisoner's Dilemma game 286
14.2. The N-persons Prisoner's Dilemma 289
14.3. Psychological variables in the Prisoner's Dilemma 293
14.4. Dynamic games 297
14.5. Other experimental games 302
15. NEGOTIATION 309
15.1. Introduction 309
15.2. The structure of negotiations 310
15.3. Strategies and tactics of negotiation 313
15.4. Psychological factors in negotiation behavior 318
15.5. Negotiation in market contexts 321
Box 15.1 A negotiation case 324
16. ECONOMIC PSYCHOLOGICAL METHODS 328
16.1. A classification of methods 328
16.2. Economic psychological methods 330
16.3. The validity of experiments 335
16.4. Experimental designs 342
16.5. Validity and reliability of observations 345
16.6. Questioning techniques 349
17. CONCLUSIONS 357
QUESTIONS 363
GLOSSARY 373
REFERENCES 393
AUTHOR INDEX 417
SUBJECT INDEX 425
PREFACE
A number of books on economic psychology have appeared in the past
few years. The most recent publications are Economic Psychology: Inter
sections in Theory and Practice, I The Economic Mind,2 The Individual in
the Economy3 and Handbook of Economic Psychologl. Why produce yet
another book for this discipline? This question can be answered in various
ways.
In a sense, this book is the answer in itself. Its presentation of research
and theories is innovative in this field, at least to my knowledge. It attempts
to structure the many theories emerging in the interdisciplinary science of
economic psychology and to explain the background of the research.
The second answer is pragmatic. In our introductory course of economic
psychology for economics students at Erasmus University Rotterdam we used
several of the above mentioned books. Our experience with this material is
that, when preparing our lectures, we had to collect many additional theories
and experiments to present to our students. Furthermore, diagrams, figures
and examples had to be culled from other sources or made by ourselves. It
is not my intention to run down these publications since I think they provide
an excellent treatment of a number of topics by specialists in economic
psychology. The plan for the present book, however, emerged from our need
to present an integrated introductory course for our students, showing the
development of theories in economic psychology.
In the fall of 1989, a draft version became available to our students to
prepare them for their exam. One of the complaints we heard was: "Why has
it not been written in Dutch?" The answer coincides with the third reason for
this book. Economic psychology is a growing discipline and an increasing
number of economists all over the world are becoming interested in psy
chological factors in economic behavior. Since economists usually have no
formal education in psychology, there may be a need for a presentation of
psychological ideas with their application to economics. I hope that this book
will satisfy this need to some extent.
The organization of the book is such that the main psychological theories
are dealt with in Chapters 2 to lO. With the exception of Chapter 11, the
remaining chapters are not usually dealt with in psychology textbooks. Chap-
IX
x PREFACE
ter 11 deals with several theories associated with cognitive consistency which
I consider the counterpart of rationality in economics. Cognitive consistency
deals with man's ability to pass judgments, to form and change attitudes and
to interpret his environment, whilst still retaining consistency of opinions and
beliefs. It is a guiding principle explaining many types of behavior dealt with
in the other chapters.
The structure of each chapter is such that one or two sections deal with
the basic theory behind the issue. Several applications to economic behavior
are considered in the remaining sections. Almost every chapter includes a
box illustrating the chapter. Each section finishes with a conclusion and each
chapter contains a summary. The glossary contains brief descriptions of the
main concepts dealt with in the chapters.
The main sources drawn on when compiling the chapters were thelournal
ofE conomic Psychology, the annual colloquia of the International Association
for Research in Economic Psychology, the books mentioned above and our
own personal files.
Acknowledgements
First of all, I wish to thank Fred van Raaij for providing me with a great many
valuable comments on the draft version of the book and for letting me use his
document files. In addition, I also wish to thank him for writing the introduc
tory chapter. Grateful thanks go to Peter Kaderjak for his comments on the
draft version and to Marianne Warrnerdam for her assistance in compiling the
glossary. Finally, I wish to express my gratitude to Caroline van Tienen who
skilfully corrected the English.
Preface to the second, revised edition
The development of economic psychology, behavioral economics and ex
perimental economics has been very fast during the past five years. This
provides the main reason for the revision. About half the revision has been
based on publications in thelournal ofE conomic Psychology which seems to
attract an ever increasing number of authors with an economic background.
Although having originally developed as a branch of psychology, economic
psychology seems to becoming an interdisciplinary science. This is also evi
dent from joint conferences of the International Association for Research in
Economic Psychology (IAREP) on the one hand and the Society for the Ad
vancement of Socio-Economics (SASE) in Stockholm, 1991, the Gesellschaft
fUr Experimentelle Wirtschaftsforschung in Frankfurt, 1992 and the Society
for the Advancement of Behavioral Economics in Shefayim, Israel, 1986 and
Rotterdam, 1994, on the other.
PREFACE Xl
Several scientific trends in the field are apparent:
There is an increasing interest in the economic psychology of financial
behavior. This is evident from workshops held in Exeter, 1994 and Tilburg,
1993 and 1995.
Also a growing field is experimental economics capturing a great vari
ety of economic anomalies, such as deviations from game theoretic pre
dictions, reference effects, endowment effects, status quo bias, mental
accounting, self-control and time-inconsistent preferences. The ongoing
series of 'Anomalies' in the Journal of Economic Perspectives is telling. A
separately published volume of Anomalies appeared, titled The Winner's
Curse.5
Although they have not yet reached the advanced stage of the areas men
tioned above, the areas of economic socialization and economic percep
tions also enjoy a growing interest.
A fascinating and growing area is negotiation behavior. Unlike the area of
game theory, the research here is mainly descriptive.
The new research has been judged in the light of its contribution to eco
nomic psychological theory rather than by its contribution to specific themes
or problems. It has been included by adding paragraphs and sections and a
new chapter has been devoted to negotiations.
Applications of economic psychology to business are not yet impressive,6
probably due to the existence of organizational psychology, a separate branch
of psychology. Applications to experimental economics are increasing in
number, however, and we have tried to do them justice in this respect.
Acknowledgements
Grateful thanks go to Gary Bolton, Robert East, Shlomo Maital, Sharmila
Ramadhin, Nico van der Sar and Harry Susianto for reviewing some material.
I thank Linda Schijvens and Dennis Goedhart for their assistance in editing
the revised edition. Once again, I express my gratitude to Caroline van Tienen
for correcting the English.
Notes
I MacFadyen and MacFadyen 1986.
2 Fumham and Lewis 1986.
3 Lea et al. 1987.
4 Van Raaij et al. 1988.
5 Edited by Thaler 1992.
6 Van Witteloostuijn 1993.
