Economic Rationality and Competing Behavioral Rules

• Applicant: Professor Dr. Carlos Alós-Ferrer
• Subject Area: Economic Theory
• Term: from 2012 to 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 215899445

The project concentrates on payoff-monotonic behavioral rules, especially imitation and reinforcement as modeled in microeconomics and game theory. In the first funding phase, we have shown that both behavioral rules exhibit the characteristics of automatic processes in the sense of dual-process theories. We have developed a simple analytical dual-process model which delivers predictions for response times in terms of errors and correct responses. Specifically, whenever a controlled process and an automatic one conflict, correct responses are slower, but if both processes are aligned, errors are slower. Further, decisions in case of conflict are slower than decisions in case of alignment. We started by confirming these predictions in Bayesian updating paradigms where reinforcement learning conflicts with the prescriptions of Bayesian rationality. The predictions were also confirmed in experimental Cournot oligopolies where imitation could be seen as an automatic process conflicting with more controlled best-reply behavior. Further analysis has elucidated the role of decision inertia, motivational orientations, and depletion of self-control resources. Surprising results have been obtained using increased monetary incentives and cognitive load manipulations. Increasing monetary incentives does not improve performance in Bayesian updating paradigms, even though accuracy rates are below the ceiling. Cognitive load in complex decisionmaking paradigms does not appear to result in a clear performance reduction, but, surprisingly, response times are significantly reduced, pointing out to a process shift in favor of automatic processes. In the second phase, we plan to parsimoniously test for the stability of our previous results and predictions in new but related paradigms (both individual and interpersonal), in order to establish the relevance of the dual-process approach for economics in full generality. Here we will take advantage of our experience with other paradigms and of preliminary research carried out explicitly for this purpose. We also plan to partially shift the focus towards lottery choice as the natural application of decision making under risk. We also aim to clarify the striking results obtained with cognitive load manipulations and increased monetary incentives by means of new paradigms. Additionally, we will rely on eye-movement measurements and on event-related potentials obtained by means of the EEG, as more direct process measures compared to response times or choice data. Finally, we plan to expand our formal-analytical dual-process model of response times to incorporate different settings and related research, also with the objective of delivering testable hypotheses for the other research lines and other projects within the research unit.

• DFG Programme: Research Units
• Subproject of: FOR 1882: Psychoeconomics. Interacting Decision Processes and their Consequences for Economic Performance
• International Connection: Switzerland