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Behavioral Economics - Amartya Sen

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Rutger Beerens

on 24 February 2013

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Transcript of Behavioral Economics - Amartya Sen

Sidgwick "two supreme principles-Egoism
and Utilitarianism" to be "
irreconcilable, unless indeed
by religion." Edgeworth The First Principle of Economics:
''Every agent is actuated only by self interest'' Amartya Sen Arrow and Hahn Claim: ''A market should guided by individual greed and controlled by very large number of different agents Herbert Spencer ''General happiness is mainly served by the pursuit of individual interests --> The individual interest is partly served by fulfilling general interest. Hersanyi's Model Distinction between:
- ethical preferences: what does the individual prefer on the basis of impersonal social considerations alone

Subjective preferences: what does the individual actually prefer on the basis of personal interest or any other basis?

''Rational Fools: A Critique of the Behavioral Foundations of Economic Theory'' Amartya K. Sen no... maybe not. But still I will keep this assumption
as a basic principle. Amartya: ''Why?'' But how can we explain relation between Utilitaranism
and Egoism? Knowing that:
- Egoism: Self-interest

-Utilitarianism: Social/Collective interest I alone should be as happy as possible We all should be as happy as possible Jesus! Amartya: ''No''
There must be a more earthy explanation. Utilitarianism can be a motivator for personal decision making. Edgeworth:
A model of exchange equilibrium. The core of economics is finding/establishing the equilibrium in which none else can be better of without someone being worse of
+ None would be worst of than he would be without trade But what would then be the best division?
Amartya: ''Do not know, but do not care'' The question that does matter:
In what sense and to what extent can egoistic
behavior serve the public good? The traditional economists would say:
That is right.

Someone unfamiliar would say:
this situation would lead to chaos. Amartya says:

''We should not ask ourselves the question whether
it is stable, but how could it be stable?''

But in this article a further focus on individual choice. Preferences; understanding by analizing decisions Alternative support: Someone chooses X over Y Conclusion: That person gains more utility from X than he does from Y. If you choose Y over X the next time, than you are considered inconsistent. Main conclusion: individual decision making can be understood and predicted by analyzing their previous decisions and identifying their preferences.

Previous choice determine future choices. (Rational Behavior) Amartya: ''No''

- There are non choice sources of information that determine preferences.

-Decisions may reflect a compromise
among variety of considerations of which personal welfare might be one Identifying the concepts:
''morals in decision-making'' ''As we consider departures from unsympathetic isolation abstractly assumed in economics.'' Sympathy: concern for others directly affect ones own interest. (Egoistic)

Commitment: ''While sympathy relates similar things to each other-namely, welfares of different persons-commitment relates choice to anticipated levels of welfare. One way of defining commitment is in terms of a person choosing an act that he believes will yield a lower level of personal welfare to him than an alternative that is also available to him'' (Non-Egoistic) Why is this important?
Not so much for the division of Private goods, but more so for the division of Public goods. How do we allocate public goods? Subscriptions schemes, people pay according to the benefits But people do not express their actual benefits, instead they understate their benefits As a result public goods can not be realized FREE RIDERS The assumption is made that:
People give answers that maximize their personal gains. But is this true?

Amartya: No. and why? Partly to commitment! The role of commitment
Amartya gives an example of commitment by analyzing work motivation
It would be to costly to establish supervision with punishments and rewards to enforce work motivation Instead: attitudes towards work are developed which supersede the calculation of net gain from each unit of exertion. Ideology

Business ethics

Mutual Trust


Morality Amartya's reaction:

“This dual structure permits us to distinguish between what a person thinks is good from the social point of view and what he regards as good from his own personal perspective,”

Problem: ''Sympathy enters the model through subjective preferences, but the problem of ‘commitment’ is left unclear.

But what if Commitment???

''What if he departs from his personal welfare maximization (including any sympathy), not through an impartial concern for all, but through a sense of commitment to some particular group, say to the neighborhood or to the social class to which he belongs?'' Sen's (complex) Solution Sen believes “we need to consider rankings of preference rankings to express our moral judgments,” (p337, Sen).

Sen proposes a complex structure to incorporate all issues which arise when people make decisions. It attempts to measure utility with regard to self-interest, sympathy, and commitment. Sen recommends a meta-ranking of possible preferences an agent may have given a set of circumstances. Let X be the set of a combination of actions available given the circumstances and then let Y be ranking of the set X. Let a third set M be the meta-rankings of set Y. This multiple ranking system allows for a variety of measures be put on a persons decision making. The set Y can be comprised of rankings base on (a) self-interest, (b) sympathy, and (c) commitment. The meta-ranking of that set can rank these rankings based on given level of utility produced given a person’s morals and interests. Conclusions:
Decisions are not always simple actions where a simple preference yields the best utility Outcomes can not be simply judged; people do not always incorporate so much thought into their own actions it is possible to see that individuals can act with regard to their self-interest, consciousness about social welfare, and within a framework of morals. Sen's complex ranking system more completely represents all the issues that can take place when a person makes a decision Depending on where an individual’s preferences exist in the meta-ranking set, it is possible to establish the ‘mean’ of a person’s actions. Classical economic models have assumed that this mean sits at ‘self-interest’ preferences. If a complex system like Sen's does have merit in decision making, than it can be argued the people are not rational decision makers and they do not always try and maximize their own utility. This system judges actions by on self-interest, morals, social welfare and would could be an endless list of perspectives. Obviously people do not act on all these factors when making decisions. Because their actions do not reflect all these variables, the outcomes will probably not maximize their own utility. People may make a decision, but in reality they have made the wrong one. Not only can the lack of information cause people to make bad decision, but an inability to incorporate morals into decision may create negative circumstances Discussion:
Explain the concepts of commitment and Sympathy in the Following example that was given by Amartya

The contrast between sympathy and commitment may be illustrated with the story of two boys who find two apples, one large, one small. Boy A tells boy B, “You choose.” Boy B immediately picks the larger apple. A is upset and permits himself the remark that this was grossly unfair. “Why” asks B. “Which one would you have chosen, you were to choose rather than me?” “The smaller one, of course,” A replies. B is now triumphant: “Than what are you complain about? That’s the one you’ve got!” (328, Sen) How to incorporate morals in decision-making?? By Noël Beerens End
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