Sociality, Rationality, and the Ecology of Choice

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Sociality, Rationality, and the Ecology of Choice

• Daniel McFadden
• University of California, Berkeley
• May, 2009

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Outline

• Sociality, Rationality, and Choice Behavior
• How Sociality Influences Economic Behavior
• Selected Literature
• A Classification of Effects
• Modeling Social Network Effects on Choice
• Constraints
• Information and Perceptions
• Preferences
• Altruism
• Norms, Accountability, Approval, Sanctions
• Experienced and remembered satisfaction
• Network-influenced decision-making
• Endogeneity in Network Affiliations and Network
  Effects

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Sociality

• Definition The tendency to associate in or form
  social groups and networks. The effect on human
  (economic) behavior of affiliations with social
  networks e.g.,
• Families Co-workers Tribal
  and ethnic groups
• Friends Teams
  Political parties
• Neighbors Religious sects
  Affinity/interest groups
• Membership in some social networks is by default
  e.g., family, demographic and ethnic groups. Why
  do people affiliate voluntarily with other social
  networks?
• Efficiencies in information collection and
  sharing
• Joint production and division of effort,
  risk-sharing
• Opportunity-based homophily (OBH) requires
  reciprocity
• Decision-making economies, approval, support,
  status
• Preference-based homophily (PBH) requires trust,
  altruism

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Reciprocity

• Often explained by enlightened self-interest
• Synchronous reciprocity is simple
• Asynchronous/multilateral reciprocity requires
  reputation and trust
• Norms of reciprocity and fairness may evolve in
  social networks through
• Accountability, approval, and sanctions
• Selection by recruitment, quits, and expulsions
• Group selection networks with effective
  reciprocity and fairness norms that make them
  more successful are more likely to survive

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Altruism

• Preferences depend on the satisfaction of other
  network members e.g., through personal welfare
  functions of individualistic felicities of
  oneself and others (Browning Chiappori, 1998)
• Question How do you know how satisfied others
  are?
• Self-reports may be unreliable Learn to
  complain without suffering.
• Consumers may evaluate the felicity of others
  using their own tastes, and their expectations
  regarding others circumstances
• One may use observed choices of others to infer
  status, satisfaction
• The hedonic treadmill may operate interpersonally
  as well as intrapersonally, with changes in
  satisfaction weighing more heavily than status
  quo, strong aversion to losses for oneself and
  others, and aversion to innovations that are
  unfair, particularly but not exclusively to
  oneself
• Altruism is weaker toward people who when
  similarly situated behave differently than
  oneself (Luttmer, 2001)
• Altruism is stronger toward people who
  demonstrate altruism to other network members
  multilateral reciprocity (Tagiuri and Kogan,
  1957)
• Altruism may be an internalization of reciprocity
  norms that solve the repeated game of resource
  allocation within networks

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Sociality, Rationality, and Choice Behavior

• Limitations of neoclassical consumer theory
• Consumers meet in the marketplace, but are
  individualistic and egocentric in their tastes
  and beliefs. They are indifferent to the welfare
  of others, and have sovereign preferences and
  expectations.
• A consumer never lets social interactions get
  under her skin and directly touch her perceptions
  or preferences. Rivalry in markets may be
  up-close, but if it becomes personal, then one
  has to take it outside (of classical economics).

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Market Interactions
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How Sociality Influences Economic Behavior

• Selected Literature
• Smith (1759) "Every man feels after himself, the
  pleasures and pains of the members of his own
  family.
• Edgeworth (1881) "... efforts and sacrifices ...
  are often incurred for the sake of ones family
  rather than oneself.
• Veblen (1899) human instincts of emulation,
  predation, workmanship, parental bent, and idle
  curiosity dictate consumption behavior
• Dusenberry (1949) Schelling (1969,1971), Manski
  (1993), Samuelson (2004) agents' decisions are
  guided by inferences drawn from observations of
  others' decisions.
• Banerjee (1992) We often decide on what stores
  and restaurants to patronize or what schools to
  attend on the basis of how popular they seem to
  be.

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Modeling the Effects of Sociality

• Brock Durlauf (2001,2002) The utility or
  payoff an individual receives from a given action
  depends directly on the choices of others in that
  individual's reference group a field effect, as
  opposed to the sort of dependence which occurs
  through the intermediation of markets.
• Dugundi Walker (2004) Interdependencies
  across decision-makers are captured through
  choices of others and correlation of
  disturbances
• Myagkov et al (2007) Individuals are generally
  tolerant of the risks of affiliating with social
  networks, including the risk of rejection or
  expulsion, and the risk associated with the
  productivity of group interactions

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How Sociality Influences Economic Behavior

• A Classification of Social Network Effects
• Constraints
• Information and Perceptions OBH and field
  effects
• Preferences PBH
• Altruism
• Norms, Accountability, Approval, Sanctions
• Experienced and remembered satisfaction
• Decision-making inside networks
• Emulation/Herd behavior field effects
• Reciprocity
• Approval and reinforcement of remembered
  satisfaction when choices are consistent with
  group norms PBH

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Constraints

• Neoclassical choice models can handle constraints
• Primary focus budget constraint operating
  through market prices and income
• Non-market externalities (e.g., congestion,
  social network field effects) can be accounted
  for in rational preferences
• Some constraints may come from two-stage
  budgeting, with the upper stage a bargaining game
  among network members
• Some constraints may come from obligations to
  social networks
• Instrumental activities (e.g., travel) are part
  of household network production of personal
  benefits
• Exposure to constraints may be voluntary (e.g.,
  choosing to travel to the beach on a crowded
  weekend)

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Perceptions

• Classical model Consumers form and act on
  realistic, rational expectations based on sound
  statistical analysis of all available information
• Behavioral model Memory is imperfect, personal
  probability calculus is inconsistent
• First, last, and extreme occurrences, and
  coincidences, are selectively remembered
• Small probabilities are either overestimated or
  ignored
• Analogies and exemplars (drawn from social
  networks) are used in place of carefully
  calculated risk probabilities
• Risk perceptions are modulated by attention, and
  distorted by systematic errors in subjective
  probability calculus

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Why am I so often stuck in the slower lane?

• Redelmeier and Tibshirani (1999)
• We videotaped traffic sequences by mounting a
  camera in a moving vehicle and filming the
  side-view perspective of the next lane on a
  congested road. When a section of videotape
  showing a slightly slower average speed in the
  next lane was screened to driving students (n
  4120), 70 stated that the next lane was moving
  faster and 65 said they would change lane if
  possible.
• What causes this common misperception?
• Psychophysical effects
• Extension effect time rather than distance
  averaging

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Psychophysical effects

• An overtaken vehicle is quickly out of sight (and
  out of mind), and an overtaking vehicle is a
  visible source of irritation until it disappears
  ahead
• Losses from the status quo outweigh gains, and
  are more memorable
• Slowly moving drivers may be more attentive to
  adjacent lane activity
• Humans (and other animals) are more stressed by
  objects moving toward them in their visual
  periphery than objects moving away from them in
  their central vision

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All drivers are being passed 58 of the time!
Blue Lane
Red Lane
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Network Information and Perceptions

• Networks collect and disseminate information on
  attributes of choice alternatives (Banerjee,
  1992 Manski, 1993 Kohler, 1997 Brock
  Durlauf, 2002)
• Contagion and non-unique equilibria are
  theoretically and empirically likely
• To identify preference-based homophily (PBH) and
  contagion effects (Manskis reflection problem)
  requires observations on dynamics (with an
  attendant initial values problem) or exogenous
  modulators of contagion
• Importance of network information depends on
  reliability/trust and content (share of
  first-adopters)
• PBH increases likelihood that network choice
  patterns are predictive for ones own
  satisfaction

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Ambiguity AversionBalls are red or black you
win if you pick red!
BOWL A
BOWL B
N 10, R 5
N 10, R ?
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Behavioral Consequences of Irrational
Perceptions

• Resource allocation efficiency loss
• E.g., Drivers switch lanes too frequently
• Ex Post regret and mistrust of perceptions
• Rational aversion to ambiguity (Gilboa and
  Schmeidler, 1989 Fosgerau De Borger, 2008)
• Protective precommitments (e.g., never a
  borrower or a lender be)
• Use network information to form, confirm
  perceptions
• Emulating network behavior limits ex post regret
• Stable response to moderate shocks, chaotic
  response to large shocks (Aoki, 1996)

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Preferences

• Classical model Consumers have utility based on
  their individualistic outcomes, and are
  indifferent to the welfare of others
• Behavioral model Consumers have individualistic
  felicities, but also have personal welfare
  functions that may depend on
• (Indicators for) the felicities of others
  altruism
• Comparisons with outcomes of others status,
  predation,
• Approval by others
• Accountability and sanctions

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Trust Game

• One-shot game, two anonymous players, no
  communication allowed
• Experimenter gives 100 MU to Player 1 (Investor)
• Player 1 invests 0 x 100 with Player 2
  (Trustee)
• The experimenter triples the investment so that
  Trustee receives 3x in total
• Trustee gives 0 y 3x back to Investor, keeps
  3x y
• Rational play for individualistic players
  Trustee returns y 0, therefore Investor invests
  x 0

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Experimental Trust Game ResultsBerg-Dickhaut-McCa
be (1995)

• Results (for experienced players)
• Average investment by Investor
• x 56.1 of endowment (56.1 MU)
• Average return by Trustee
• y 40.2 of augmented investment (67.6 MU)

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What are Investors Thinking?

• Suppose investors believe that all players have
  the same CARA felicity function, u(c)
  -exp(-dc)/d, d 1, and that trustees are of
  three possible types
• Selfish /Rational Trustee will return nothing
• Utility-maximizer Trustee altruistically
  maximizes the sum of (own felicity) ?(Investor
  felicity)
• Reciprocal the Trustee will return the
  investment and half of the extra income the
  investment generates, or 2x
• Investor max Ey -exp(-1x-y) - ?exp(y-3x)
• If ? gt 0, then the players are somewhat altruistic

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The McCabe data is explained by

• The Investor is altruistic to the degree ?
  0.05, and believes that utility-maximizing
  Trustees have the same ?
• The Investor believes that the probabilities of
  trustees of different types are
• Selfish 17.8
• Utility-maximizer 1.8
• Reciprocal 80.4
• A model with altruism and reciprocity is
  under-determined from this experiment, and the
  types and probabilities above are not unique, but
  fit illustrates that a mix of selfish,
  altruistic, and norm-driven behavior may explain
  results in trust game and similar games

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Trust Fehr strikes the heart of neoclassical
consumer theory

• Trustee subgame is a dictator game where fairness
  norms matter, trust doesnt
• Ernst Fehr U. Fischbacher (2004) Baumgartner
  et al (2008)
• Investors who are administered the trust
  peptide oxytocin choose substantially higher
  investments than those administered a placebo
• Trustees behave the same with oxytocin or placebo

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Sociality and Rationality Process

• Rationality maximization of individualistic
  felicity subject to applicable constraints
• Sociality use analogies, exemplars, and
  heuristics influenced by information from social
  networks, and imitation and approval of social
  networks
• Consumers seem to be close to individualistic
  rationality when stakes are high, but show
  influence of sociality when stakes are modest and
  alternatives are unfamiliar

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Emulation as a Decision-Making Strategy

• Affiliation with social networks, limiting choice
  by accountability to network norms, can be an
  efficient decision-making strategy
• Competitors in bicycle racing form a pellaton
  that provides an energy-saving, choice-limiting
  environment a model for choice in networks?

Affiliation is voluntary, and breakaways to
form new pellatons are common e.g., network
affiliations can be endogeneous
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How Do Social Network Effects Influence Choice?

• Dugundji Walker (2005) enter neighborhood and
  affinity network effects in a mode choice model
  for Amsterdam
• Network effects may be due to
• Preferences of network members (unobserved PBH,
  treated econometrically as a random effect)
• Network-communicated information (field effect)
• Supply-side/equilibrium constraints and
  conditions
• The authors find that both neighborhood and
  affinity network field effects are significant,
  homophily effects do not add significant
  explanation
• The study does not solve the reflection problem
  to untangle PBH, field, and supply-side (OBH)
  sources of network effects, or handle endogeneity
  

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Sorting out homophily, field, and equilibrium
effects

• Affinity network effects most likely come from
  PBH and field (information) factors
• Neighborhood network effects are likely to come
  from OBH and supply-side constraints and
  conditions
• Field and supply-side effects act through market
  equilibrium, and are likely to be endogenous when
  entered as explanatory factors in choice models
• Voluntary affiliation may make network membership
  endogenous

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Modeling endogenous network effects

• Notation j individual, k network, j
  1,,Nk
• Binomial (for example) choice
• djk 1(Xjkß Yk? ak ejk gt 0),
• Network share sk ?j djk/Nk
• Xjk mode attributes and individual
  characteristics
• Yk network equilibrium (field and supply)
  effects
• ak network PBH random effect
• ß, ? parameter vectors
• ?k g(sk,Zk,Yk) network equilibrium, Zk
  exogenous
• e1k .... eJk and ?k are independent disturbances
• If no Zk, other restrictions are needed to solve
  the reflection problem

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Consistent BLP (1995) Estimation (given Zk)

• Choice probability (logistic disturbance ejk)
• Pjk EaYL(Xjkß Yk? ak)
• 1. Estimate model by MLE with network fixed
  effect
• Pjk L(Xjkß ak)
• 2. Let ak µ ?k and estimate the linear model
• ak Yk? µ ?k
• using Zk as instruments
• The method is consistent for ß,?, and moments of
  ak when network affiliation is predetermined, but
  PBH and/or contagion/field effects make network
  equilibria endogenous

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Conclusions

• Sociality matters!
• Social network effects influence economic choice
  behavior through constraints, perceptions,
  preferences, and the decision-making process, and
  their omission makes choice models incomplete and
  misleading
• The rational choice model can be expanded to
  encompass field, OBH, and PBH effects, and
  altruism
• Econometric analysis must account for
  equilibrium, endogeneity of field effects,
  endogeneity of network affiliations
• Identification may require study of dynamics of
  field effects
• Reconciliation of rational choice models with
  reciprocity and other social norms that make
  sense in the context of repeated games,
  reputation, and evolution will require deeper
  analysis of the dynamics of preferences and
  strategies in repeated games

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