Economic theories of choice, or why we think like frogs

The man of classical microeconomic theory is, by approximation, superhuman. As the holder of perfect rationality and perfect information, he is in fact able to always make the right choice. In the face of any decision, perfect rationality allows the homo oeconomicusto see all the possible options, to attribute a precise value to each and finally to choose the alternative to which the maximum value is attributed. In other words, for example, if a product is the best it can be, then it is chosen; conversely, if a product is purchased (or an action is taken), we can then infer that it is the best possible. Furthermore, all this takes place in a state of perfect information, so the individual’s decisions are not influenced by the context. It doesn’t matter how many or which adjectives the teleseller uses to describe that set of knives, or the auctioneer to praise that watercolor: a perfectly rational individual will not be influenced in his evaluations. In the extreme consequences of these premises, the perfectly rational agent, fortunately for him, feels no remorse or repentance, because he does not change his mind about the value of what he observes and does not learn from experience, and because he simply does not need it. We will therefore say that he always choosesthe best in an absolute and not a relative sense .

 

Yet, anyone, in their human experience, has at times experienced the disappointment or pleasant surprise that follows an error of judgment. The homo oeconomicus of classical microeconomic theory – that is, the man who is able to observe and evaluate all the alternatives at his disposal, without ever contradicting himself or having to discover that he is wrong – is not, as it might seem, just a harmless approximation of the average man, but the representation of a superhuman being to which it was generously decided that man resembles.

 

The dichotomy between perfect rationality and irrationality as its only antithesis was overcome in the 1950s by the studies of Herbert Simon . His contribution in this area lies in having introduced the concept of bounded rationality into economic thought(limited rationality), in which we can all more likely recognize ourselves. In this new paradigm, rationality remains in the procedure of choice, but manifests limits in its application. As is evident, in fact, we are not omniscient, and our perception of reality is neither clear nor complete, but rather fragmented and approximate. For this reason, no matter how rigorous the selection criteria we have adopted, we may always realize that we are wrong or have simply changed our minds, since our cognitive abilities are imperfect and our opinions are not definitive. From empirical observations, for example, it emerges that it is easier to definitively identify the preferred alternative between two options when the difference in their value is large, while it is more likely to change one’s mind otherwise. Furthermore, once a difference in value has been set, it is easier for us to choose the more similar the alternatives are. For example, in the choice of vote it is probably easier to express a clear preference between a candidate of the extreme right and one of the extreme left than between two candidates from the same party. And in the absence of a meter or a scale, it is easier to understand which of two portions of cake is greater if their size is the same.

 

There are also cases in which our choices seem to express contradictory preferences . For example, alternative A may be preferred over B when only these two alternatives are offered, but B is chosen if C is also available. This would be impossible according to the classical paradigm, since the choice of A in the first scenario would imply that A is judged absolutely better than B, while with the introduction of C the exact opposite would be implied. The next three cases are examples of these reversals of preference .

 

– Bait effect

For example, imagine you want to buy a smartphone. The choice is between a base model B and a more expensive model A but with more attractive features. The preference however tends towards the B model. Among the other proposals in the store we also find the C model, at a higher price than A but with more obsolete features. The very existence of C could lead us to believe that the purchase of A is actually convenient, to the point of shifting our preference towards A.

 

– Compromise effect

The tradeoff effect occurs when introducing an alternative opposite to a given one shifts the preference towards the median option. Returning to the example of smartphones A and B, let’s suppose this time that the more expensive and more complete model A is preferred to B. The compromised effect would occur if C were a cheaper model with worse characteristics than B, for whose presence would make B appear to be a good compromise, to the point of making it preferred to A.

 

– Ghost option

The two effects also occur when the third alternative C is not really available, but the awareness of its existence is enough to change the preferences of the decision maker. Our examples would therefore also be valid if the sales employee, after having talked extensively about C, were to tell us that the stocks are unfortunately exhausted.

 

These phenomena of influence of the context on our preferences are evident not only in consumer choice scenarios, but also in voting or investment scenarios. Or, no less interesting, in the mating choices of the túngara frogs.

 

In 2015, biologists Amanda M. Lea and Michael J. Ryan conducted a study with the aim of analyzing the preferences of the female túngara frog.in the choices of the partner. The experiment was carried out in the laboratory, where, in a tank, each female specimen was exposed to the same three artificially recreated and reproduced calls, distinguished by two characteristics. Data were collected on the frequencies of choice between the three recalls and from each possible pair, as well as from pairs with phantom option. In the latter case, all three calls were reproduced from points equidistant from the female specimen, but two were reachable while the third came from the ceiling and was therefore judged out of range. Well, observing the frequencies of choice and noting inversions in preferences that are not compatible with the paradigm of classical economics, Lea and Ryan conclude that there are no absolute preferences in mating choices and that therefore it is not possible to identify absolutely rewarded traits in the course of evolution. The experiment assumes economic interest since the features ofirrationalities found in the analysis are common to those found empirically in the choices of the human decision-maker: should we conclude that man’s choice behavior is totally irrational?

 

In a 2017 study Paulo Natenzon proposed a model that differs from the classic one and reaches a different conclusion starting from the same data set. His work starts from the assumption that the decision maker – the exemplar of túngara, returning to the experiment of Lea and Ryan – is not able to obtain complete information from the observation of reality, but can only rely on partial perceptions.of the objects to be evaluated. Moreover, the call of the male túngara frog is also received by the bats, feared predators of the species, and the female must therefore resolve to choose quickly in order not to risk her own death and that of her potential partner, in an environment rich in sounds and interference. which is that of the ponds of Central America. In the Natenzon model, this means that the real utility (µ i ) that each frog associates with the male that produces the call is not observed as such, but is perceptible only with a distortion (ε i ) with zero expected value. It is assumed that µi is distributed according to a Gaussian curveand the true value of each recall is an independent extraction from the same distribution. The error terms, on the other hand, can have a non-zero correlation that expresses the degree of similarity between the alternatives and have variance depending on a precision coefficient of the information. If the information is perfectly accurate, the variance is zero. In other words, although a fixed and definitive value (µ i ) is associated with each recall, the choice based on the perceived value (µ i + ε i ) , among other things depending on the similarity of the options, may not fall on the object with maximum utility. It is therefore understandable how reactions such as repentance or joy are possible once the choice is actually experienced. Only in the case of perfect information is it possible to order the alternatives in a definitive ranking, even if their real value is not known.

 

For different values ​​of the information similarity and precision parameters, the choice inversion effects in the scenarios described above are explained. For example, the probability that smartphone B is chosen when C is also present drops to zero if C is very similar to A and the decision maker is not informed, while compromise effects can occur in the event of a low level of information or when the real value of C is very low.

 

From this it follows that contradictory preferences are not necessarily symptomatic of erratic tastes, but may simply depend on a state of incomplete knowledge, whether it is from the raids of bats and other creatures into the pond, or more likely from laziness or distraction, as well as limitations. natural cognitives. The human decision-maker like the amphibious one, therefore, responds to its limits by stealing information also from the context, up to the moment immediately preceding the resolution, in an attempt to be able to grasp the real value of the alternatives available.

 

The problem of choices is of little importance in itself when it comes to personal tastes in terms of films or books, or when you play with the feelings of túngara frogs, seduced and abandoned by unattainable ghost alternatives. But the choices are also made by parliamentarians, doctors, managers, or parents who are unsure whether to get their children vaccinated or not. Studying the formation of individual preferences and their translation into choices is not just a trivial marketing exercise: knowing our cognitive defects and identifying the deceptions of our mind can really allow us to think better about the decisions that matter. Maybe better than the túngara frogs.

 

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