M. Keith Chen

How Basic Are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior

Behavioral economics has demonstrated systematic decision‐making biases in both lab and field data. Do these biases extend across contexts, cultures, or even species? We investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys and recovering their preferences over a range of goods and gambles. We show that capuchins react rationally to both price and wealth shocks but display several hallmark biases when faced with gambles, including reference dependence and loss aversion. Given our capuchins’ inexperience with money and trade, these results suggest that loss aversion extends beyond humans and may be innate rather than learned.

The Effect of Language on Economic Behavior: Evidence from Savings Rates, Health Behaviors, and Retirement Assets

Languages differ widely in the ways they encode time. I test the hypothesis that the languages that grammatically associate the future and the present, foster future-oriented behavior. This prediction arises naturally when well-documented effects of language structure are merged with models of intertemporal choice. Empirically, I find that speakers of such languages: save more, retire with more wealth, smoke less, practice safer sex, and are less obese. This holds both across countries and within countries when comparing demographically similar native households. The evidence does not support the most obvious forms of common causation. I discuss implications for theories of intertemporal choice.

Endowment effect in capuchin monkeys.

In humans, the capacity for economically rational choice is constrained by a variety of preference biases: humans evaluate gambles relative to arbitrary reference points; weigh losses heavier than equally sized gains; and demand a higher price for owned goods than for equally preferred goods that are not yet owned. To date, however, fewer studies have examined the origins of these biases. Here, we review previous work demonstrating that human economic biases such as loss aversion and reference dependence are shared with an ancestrally related New World primate, the capuchin monkey (Cebus apella). We then examine whether capuchins display an endowment effect in a token-trading task. We identified pairs of treats (fruit discs versus cereal chunks) that were equally preferred by each monkey. When given a chance to trade away their owned fruit discs to obtain the equally valued cereal chunks (or vice versa), however, monkeys required a far greater compensation than the equally preferred treat. We show that these effects are not due to transaction costs or timing issues. These data suggest that biased preferences rely on cognitive systems that are more evolutionarily ancient than previously thought—and that common evolutionary ancestry shared by humans and capuchins may account for the occurrence of the endowment effect in both species.

How choice affects and reflects preferences: revisiting the free-choice paradigm.

After making a choice between 2 objects, people reevaluate their chosen item more positively and their rejected item more negatively (i.e., they spread the alternatives). Since Brehms (1956) initial free-choice experiment, psychologists have interpreted the spreading of alternatives as evidence for choice-induced attitude change. It is widely assumed to occur because choosing creates cognitive dissonance, which is then reduced through rationalization. In this article, we express concern with this interpretation, noting that the free-choice paradigm (FCP) will produce spreading, even if peoples attitudes remain unchanged. Specifically, if peoples ratings/rankings are an imperfect measure of their preferences and their choices are at least partially guided by their preferences, then the FCP will measure spreading, even if peoples preferences remain perfectly stable. We show this, first by proving a mathematical theorem that identifies a set of conditions under which the FCP will measure spreading, even absent attitude change. We then experimentally demonstrate that these conditions appear to hold and that the FCP measures a spread of alternatives, even when this spreading cannot have been caused by choice. We discuss how the problem we identify applies to the basic FCP paradigm as well as to all variants that examine moderators and mediators of spreading. The results suggest a reassessment of the free-choice paradigm and, perhaps, the conclusions that have been drawn from it.

One-Way Essential Complements

While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good. Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimally charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsofts joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if all browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that a essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality. There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture Bs surplus highlights the challenges facing a firm whose product depends on an essential good.

Some Thoughts on the Adaptive Function of Inequity Aversion: An Alternative to Brosnan’s Social Hypothesis

In this commentary, we review and question Brosnans hypothesis that inequity aversion (IA) evolved as a domain-specific social mechanism. We then outline an alternative, domain-general, account of IA. As opposed to Brosnans social hypothesis, we propose that IA evolved from more general reward mechanisms. In particular, we argue reference-dependence and loss-aversion can account for the evolution of IA in primates. We discuss recent work on reference-dependence and explore how it may have given rise to inequality-averse behavior in social settings. We conclude with suggestions for future work examining the proximate mechanisms that give rise to IA.

The Evolution of Rational and Irrational Economic Behavior: Evidence and Insight from a Non-human Primate Species

Publisher Summary In contrast to the neoclassical approaches, much of modern behavioral economics starts by scanning the nearby disciplines of social psychology and sociology for robust biases that may manifest themselves in economically important settings. Economists using this approach have tried to incorporate psychological and sociological findings into economic analysis by finding a functional form for preferences that captures many of the stylized facts that these biases present. Another widely used model in behavioral economics is David Laibsons Model of Time-Inconsistent Choice. Laibson modeled inter-temporal inconstancy with a Beta-Delta Model of Hyperbolic Discounting, and demonstrated how agents with such preferences could be imbedded in economic models of choice over time. Common to all the approaches is that, by and large, they take the origins and structure of behavioral biases. Most behavioral economists leave these biases to social psychologists to study, acting essentially as importers of psychological insights. In turn, the models that behavioral economists use are based on assumptions judged not only by their ability to organize economic data, but also by their psychological realism.

Are Women Overinvesting in Education? Evidence from the Medical Profession

Recent literature finds that women earn significantly lower returns to professional degrees. Does this render these degrees poor investments for women? We compare physicians to physician assistants, a similar profession with lower wages and training costs, mitigating some selection issues. The median female (but not male) primary-care physician would have been financially better off becoming a physician assistant. While there is a wage gap, our result occurs primarily because most female physicians do not work enough hours to rationalize medical school whereas most men do. We discuss robustness issues and nonwage returns to education that may rationalize these investments by women.

The Value of Flexible Work: Evidence from Uber Drivers

Participation in non-traditional work arrangements has increased dramatically over the last decade, including in settings where new technologies lower the transaction costs of providing labor flexibly. One prominent example of flexible work is the ride-sharing company Uber, which allows drivers to provide (or not provide) rides anytime they are willing to accept prevailing wages for providing this service. An Uber-style arrangement offers workers flexibility in both setting a customized work schedule and also adjusting the schedule from week to week, day to day, and hour to hour. Using data on hourly earnings for Uber drivers, we document the ways in which drivers utilize this real-time flexibility and we estimate the driver surplus generated by this flexibility. We estimate how drivers’ reservation wages vary from hour to hour, which allows us to examine the surplus and supply implications of both flexible and traditional work arrangements. Our results indicate that, while the Uber relationship may have other drawbacks, Uber drivers benefit significantly from real-time flexibility, earning more than twice the surplus they would in less flexible arrangements. If required to supply labor inflexibly at prevailing wages, they would also reduce the hours they supply by more than two-thirds.

The effect of partisanship and political advertising on close family ties

Curtailed conversations Most articles written about U.S. politics in the past few years have mentioned the increasing polarization of the electorate. But is this real, or does it merely reflect the increasing polarization of the media? Chen and Rohla estimate that in 2016, Thanksgiving dinners in which the hosts and guests lived in oppositely voting precincts were up to 50 minutes shorter than same-party-precinct dinners. That is, family members, adjured to avoid talking about contentious subjects, may have simply talked less. Science, this issue p. 1020 Cell phone tracking shows that mixed-political-party families had shorter 2016 Thanksgiving gatherings, exacerbated by political advertising. Research on growing American political polarization and antipathy primarily studies public institutions and political processes, ignoring private effects, including strained family ties. Using anonymized smartphone-location data and precinct-level voting, we show that Thanksgiving dinners attended by residents from opposing-party precincts were 30 to 50 minutes shorter than same-party dinners. This decline from a mean of 257 minutes survives extensive spatial and demographic controls. Reductions in the duration of Thanksgiving dinner in 2016 tripled for travelers from media markets with heavy political advertising—an effect not observed in 2015—implying a relationship to election-related behavior. Effects appear asymmetric: Although fewer Democratic-precinct residents traveled in 2016 than in 2015, Republican-precinct residents shortened their Thanksgiving dinners by more minutes in response to political differences. Nationwide, 34 million hours of cross-partisan Thanksgiving dinner discourse were lost in 2016 owing to partisan effects.