Last week, one of the most important Behavioral Economics conferences [link] was held at Middlesex University, London, jointly organized by the Society for the Advancement of Behavioral Economics (SABE) and the International Association for Research in Economic Psychology (IAREP). Both organizations bring together scholars who are interested in the intersection of Economics and Psychology, as well as other sciences (i.e. Sociology, Neuroscience, Anthropology, etc.) which provide us with valuable insights about human behavior and about the factors that influence people’s decision-making processes.
Behave4 had to be there! Francisco Reyes (co-founder of the company and leader of our Marketing & Operations Department) gave a talk titled “People-centric solutions for organizations: no behavioral intervention without behavioral measurement”. The talk pointed out the organizations’ need of knowing their people in a different way, with the goal of uncovering the behavioral traits able to explain companies’ Key Performance Indicators (KPIs). The main take-home? There shouldn’t be intervention without knowing first the behavioral preferences, tastes or inclinations of the people who will be the target of the intervention.
Employees’ assessments are now common in HR departments. The “oldest” perspective perhaps is measuring people’s cognitive skills, such as intelligence or IQ, whereas the newest adds personality traits to the equation (e.g. Big Five), as both have been shown to predict job performance. Our proposal is to complement these assessments using a behavioral perspective built upon the measurement of people’s behaviors and preferences to be used as predictors of job performance, among many other applications.
One of the most important advantages that Behavioral Economics assessments offer us is related to the fact that people reveal their “real behavior” because they make decisions with real monetary consequences based on the concept “incentive compatibility”.
But the conference had many more fantastic things to offer! Let us introduce you the very prestigious keynote speakers who were presenting their last research at the conference: Joe Herbert (University of Cambridge), Colin Camerer (Caltech), Elke Weber (Princeton), David G. Rand (MIT) and Peter Wakker (Erasmus School of Economics) Joe Herbert gave us an interesting talk titled “The covert influence of hormones on financial decision making”. He went into the effect of testosterone and cortisol when people make financial decisions.
That is not a trivial question since science has demonstrated that hormonal changes play an important role in human behavior, therefore also influencing financial decision-making. For example, what happens when cortisol and testosterone levels increase? Herbert’s team has demonstrated that elevated salivary levels of cortisol predict risk-taking and price instability in market experiments with male participants. Cortisol can thus destabilize markets, especially in only-men environments. Moreover, cortisol and testosterone administration increase men’s preference for investing in high variance stocks (Cueva et al., 2015). The role of hormones in shaping financial markets outcomes can be huge! Interestingly, this also means that markets might be more predictable and “controllable” in the future thanks to our deeper knowledge of the biological forces underlying instability.
Dave Rand dove into the trending topic of the moment in social media networks: “Fake News: Who falls for it and what to do about it.” This is not a minor issue considering the results of the general elections in USA and Brexit in UK.
We can address the fake news problem from a Behavioral Economics perspective, as Rand said. In this case, we learned from his research that thinking is NOT the problem: “…fake news has similar cognitive properties to other forms of bullshit receptivity, and reinforce the important role that analytic thinking plays in the recognition of misinformation.” (Pennycook & Rand 2018). Inattention and “cognitive laziness” are thus the problem. People’s tendency to rely on analytic thinking can indeed be measured, as we in Behave4 know and recommend organizations to do. Moreover, the good (not fake) news is that Rand’s research also shows that fake news receptivity can be reduced using nudging techniques from Behavioral Economics.
Colin Camerer was talking about “Salience in game theory and economics”, where he pointed out the importance of accounting for people’s attention to salient outcomes or stimuli during economic decisions.
But, what is salience?
Salience is what grabs attention: “Salience is the phenomenon that when one’s attention is differentially directed to one portion of the environment rather than others, the information contained in that portion will receive disproportionate weighting in subsequent judgments” (Taylor, Thompson, 1982). Extrapolating this concept to game theory: “Some labels are more prominent or conspicuous or salient than others; they ‘stick out’ or ‘suggest themselves’ typically by virtue of analogies or associations of ideas which connect those labels to some aspect of the common experience, culture, or psychology of the players” (Mehta et al. 1994)
Let us stop a bit more in this topic. If we consider the functional components of attention we observe two types of processes that play an important role in how we perceive the world around us: bottom-up (automatic) and top-down (deliberate) processes. Both types of processes influence our internal state, emotions and decision-making. One key question is, is artificial intelligence able to detect the salient stimuli as humans do? According to Camerer’s talk, the answer is yes, but only if we refer to bottom-up processes (salience filters: contrast, shiny, shapes, etc.) that operate from our evolutionarily “old” brain areas.
Please have a look at this image:
What is for you salient here? Bottom-up brain processes pay attention to those stimuli that are visually salient and these can be predicted using AI with high accuracy (see the image where bottom-up salient stimuli are highlighted). However, many of us also pay attention to the woman’s glasses because it is unusual that a gymnast is wearing glasses while she is competing, and this saliency is the target of top-down processes which are typically encoded in prefrontal, “modern” brain areas. So far, however, AI cannot predict attention to such a kind of stimuli that require knowledge of what is (un)usual, culturally (in)acceptable, etc.
Maybe in the future, AI machines will be able to learn how such top-down processes work, but we are yet far from there. The world still needs humans for a long time! Behave4’s people-centric philosophy also builds upon the idea that AI cannot yet substitute human intelligence – which also applies to HR research and management, where AI methods are gaining attraction (perhaps, too) rapidly.
Sustainability and Climate Change are two of the most challenging issues that the world needs to address soon for sure. Could Behavioral Economics make its contribution to make the world a better place to live? Elke Weber showed us a number of areas in which such a contribution can be made, in particular, by means of choice architecture techniques able to turn people more focused on the long run and more prosocial, both key elements for environment-related decision-making. Not in vain, the sustainability of natural resources is a public good that requires the cooperation of everyone, and the benefits of that cooperation will be realized mostly in the future. Her great talk was titled “Choice Architecture for Sustainability: Giving the Future a Chance”. In Behave4, we indeed know of the importance of measuring people’s long-run orientation and prosociality to design profitable interventions.
Finally, to close this awesome conference Peter Wakker gave us some excellent keys about ambiguity aversion and its influence on decision-making during his talk, “Measuring Ambiguity Attitudes for All (Natural) Events”. Very interestingly, Wakker underscored the importance of measuring ambiguity aversion properly. What’s ambiguity? In technical terms, uncertainty can be of two main types: risk, where probabilities and expected benefits are known, and ambiguity, where probabilities and expected benefits are unknown. As you can imagine, the latter is largely more common in our daily-life decisions. Behave4’s team also believes in the relevance of measuring people’s ambiguity aversion, as well as their risk aversion.
In sum, we will for sure attend next year’s SABE/IAREP conference in Dublin!!
Big thanks to the organizers for such a great time in London!