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Economic Psychology Between Psychology and Economics an Introduction

Economic Psychology Between Psychology and Economics an Introduction

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Economic Psychology
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Economic Psychology Between Psychology and Economics: An Introduction
W. Fred van Raaij
Erasmus University, Rotterdam, The Netherlands
´ sente, dans cette introduction a ` l’e ´ dition spe ´ ciale sur la psychologie On pre ´ conomique, trois e ´ tapes et trois domaines de cette psychologie. Les trois e ´ tapes repre ´ sentent les tentatives historiques pour introduire des approches e ´ orie e ´ conomique. Les deux et des concepts psychologiques dans la the ` res e ´ tapes ont e ´ te ´ voue ´ es a ` l’e ´ chec, mais la dernie `re et actuelle premie ´ conomie psychologique) paraõˆt plus prometteuse. Les trois domaines (l’e ´ conomique qui sont traite ´ s dans cet article sont: de la psychologie e ´ conomique, la psychologie macro-e ´ conomique et la psychologie micro-e ´ conomie psychologique. Les six articles de cette e ´ dition spe ´ ciale sont des l’e ´ sentants de ces approches et traitent de sujets inte ´ ressant aussi bien les repre ´ conomistes, les spe ´ cialists du marketing que les conseillers psychologues, les e ` s des consommateurs. aupre In this introduction to the special issue on economic psychology, three waves and three domains of economic psychology will be discussed. The three waves are the historical attempts to introduce psychological concepts and approaches in economic theory. Although the rst two waves were unsuccessful, the third and present wave (psychological economics) looks more promising. The three domains of economic psychology that are discussed in this paper are: (1) micro-economic psychology, (2) macroeconomic psychology, and (3) psychological economics. The six papers in this special issue are examples of these approaches in economic psychology, and discuss interesting topics for psychologists, economists, marketing professionals, and consumer educators alike.

This is a special issue of Applied Psychology on economic psychology. Six papers from various continents have been brought together to give an impression of this area of applied psychology. What is economic

Requests for reprints should be sent to W. Fred van Raaij, Rotterdam School of Management, Erasmus University, Burg. Oudlaan 50, 3000 DR Rotterdam, The Netherlands. c 1999 International Association of Applied Psychology

These behaviours have strong psychological components.264 VAN RAAIJ psychology? In the rst place. how this is affected by advertising. how satis ed or dissatis ed they are with their consumption. In this perspective. how people organise and perform household work. and . invest. But even if the behaviour is enjoyable for its own sake. unemployment. buying groceries. because we spend money during the trip and forego the opportunity to earn money. time. Economic behaviour is reaching desired goals (achievements. and following a speci c diet) to reach the objective of being healthy and in a good physical and mental condition. Tourism is a behaviour that is attractive in itself. making a career. bene ts. The opportunity costs are that we cannot do other behaviours at the same time. economic psychology is concerned with economic behaviour and its antecedents and consequences. Almost all behaviours can be considered as economic behaviours—at least. time. and relaxing are desirable behaviours to perform in their own right. but are effort expenditures to reach the desired goal. In its broadest sense. e. In this perspective. money. This means that economic behaviours are omnipresent. which products. economic growth and decline. eating less. services and brands they buy. sightseeing. Working in a paid job. tourism and travelling are all types of economic behaviour. These behaviours are normally studied by educational and organisational psychologists. save. Are all behaviours economic behaviours? Most of us want to do things as ef ciently and effectively as possible. decision making. doing household work. Van Raaij (1981) de nes economic behaviour as behaviour involving sacri ces in money. motivation. preference. Economic psychologists study how people spend. But what is economic behaviour? Economic behaviour is related to the use of scarce resources. and borrow money. choice. how people are affected by in ation. ‘‘Dieting’’ is a domain of several behaviours (eating less fatty food. most behaviour is concerned with trading off scarce resources to obtain desired bene ts. Making love. perception. we incur opportunity costs.g. Our holiday trip is economic behaviour. trading off the economic costs of resources and the bene ts of reaching desired objectives and goals. The set of behaviours must be restricted in order not to include all behaviours.g. attending courses as a student. the behaviours are means towards an end and the desired end state is our goal. poverty. dieting behaviours are not attractive in themselves. attitude. and effort. although tourists carrying their luggage and waiting in airport lounges do not give the impression that they enjoy what they are doing. Behaviour may also be appreciated for itself. e. This includes educational and organisational behaviour. almost all behaviours include an economic trade-off. Economic behaviours are thus behaviours from the domain of economics. or end states) by using scarce resources. and satisfaction.

is concerned with economic behaviour and its antecedents and consequences. trust. It involves the antecedents of buying. knowledge. Economic psychology is broader than just economic behaviour. maintenance. and even complaining and getting redress. An important subgroup in this domain is consumer behaviour. decision making. con dence. Xenophon published Oikonomikos. framing and the evaluation of gains and losses in prospect theory (Kahneman & Tversky. and complaining. their advertising and distribution. and processes to support consumption such as nancial management. HISTORY OF ECONOMIC PSYCHOLOGY Already in ancient Greece. The third domain is concerned with heuristics in utility theory. the national and supranational economy.INTRODUCTION 265 effort in order to reach present or future bene ts. and expectations with regard to economic institutions such as the monetary system and economic policy. in the context of marketing and consumer protection policy. is concerned with psychological factors in economics. product maintenance. satisfaction.C. simply. con dence. and willingness to buy. macro-economic psychology. It involves the climate for and satisfaction with consumption (level). personal factors such as needs. bene ts. In the fourth century B. both at the individual and the aggregate level. market segments. time. household decision making. negotiations. wealth. discretionary income. The second domain. 1979). Taking an educational course is thus an economic behaviour. This contribution of psychology is also approached from economics and then called behavioural or psychological economics. micro-economic psychology. A well known economic psychologist is George Katona (1975). Is this enough to de ne economic behaviour? Economic behaviour is the set of processes and acts of sacri cing scarce resources (money. because it involves money and time to reach the bene ts of better insights and knowledge. skills or. At least three domains may be distinguished. tasks in the household (oikos) were studied. and effort) in order to acquire products and services that provide desired bene ts and end states. Economic behaviour also involves processes such as nancial management. the ‘‘book on . It involves the consequences of buying such as ownership. Economic behaviour involves buying or not buying products and services. such as the supply of goods and services. a diploma. The rst domain. The aggregate level of the micro approach includes consumer groups. Thus. for instance. and the social and environmental effects of consumption. economic behaviour involves consumption or non-consumption. who developed the Index of Consumer Sentiment. These three domains will be used as sections in the remainder of this paper.

but rather an ‘‘inductive’’ set of generalisations from pragmatic observations and experiences. Tarde wrote a two-volume book La Psychologie Economique. have stable preferences. This book is an essay on the conspicuous consumption behaviour of the wealthy nouveaux riches in the United States. medicine. in which he describes the social reference in uence in consumption and lifestyle.266 VAN RAAIJ ¨ np ug. i. Specialised professions then developed. a set of descriptions and rules of conduct guiding ef cient and effective behaviour. Economy psychology is thus not a derivative or ‘‘application’’ of general or theoretical psychology. more areas of production such as mining and forestry developed. In 1902. he criticised the conspicuous lifestyle of the wealthy American tycoons such as Morgan and Vanderbilt. that economic decision-makers are fully informed about the choice alternatives. born in Norway and living in the United States. 1976). Tarde’s and Veblen’s work may be regarded as the ‘‘ rst wave’’ of economic psychology (Van Raaij. including economic psychology. This text is pragmatic and advisory.g. are self-interested. Prediction is often more . could a merger of applied and theoretical psychology take place. Most economists know that the neo-classical assumptions are in con ict with evidence from psychological research. Man is a social being and the interaction between people should be the basis for economics. and slaves. and economics. e. During the rst part of the twentieth century. when psychology developed as a science. and maximise utility.11). wife. In this book. For Tarde. husbandry’’ (Scho and discusses the organisation of the household and the division of labour between husband. Another social scientist. but they use these assumptions because of their simplicity and because it is an easy start for economic models and theories. Examples are engineering. The concern for pragmatics provided the basis for applied psychology. Only later. In the neo-classical paradigm of economics. 1992. economics developed as a science.e. the assumptions could be relaxed (Coats. The concept of ‘‘economic psychology’’ was probably used for the rst time in 1881 by the French social scientist Gabriel Tarde (1843–1904). Tarde became well known for his book The Laws of Imitation (1890). and urged the development of ‘‘pragmatics’’. behave rationally. published in 1899 the book The Theory of the Leisure Class. especially during the Renaissance. The household in ancient Greece and Rome was the centre of economic organisation and agricultural production. 1985). Thorstein Veblen (1857–1929). This is an economic-psychological and sociological topic. If predictions based on these assumptions are refuted. the assumptions on human behaviour are unrealistic. p. and the observations and inductive generalisations be placed in a theoretical framework. education. economic psychology is especially concerned with the fundamental assumptions of economics. In the Middle Ages.

asset returns seemed to covary with market risk. He and others tried to introduce behavioural science in mainstream economics in the 1920s (Veblen. Lakatos (1968) concludes that the defenders of the neoclassical paradigm survived the attack and came out of it even stronger than before. Their prospect theory and their research on biases and heuristics brought psychological or behavioural economics into the mainstream of economics. In asset pricing. In the 1970s strict rationality assumptions threatened to eliminate even the most modest psychological content remaining in economic analysis. and the results from psychological research could not be disregarded in economics. & Tversky.INTRODUCTION 267 important in economic research than an accurate description of the processes and variables involved. Slovic. 1979. 1961). these approaches were overruled by the rational approaches in economics. Macro-economists adopted this in their models of adaptive expectations and rules of thumb. If this is true. The 1978 Nobel prize winner Herbert Simon. The ‘‘third wave’’ is the introduction of behavioural or psychological economics. Psychology was clearly ‘‘out’’ and a ‘‘big bang’’ was needed to reintroduce psychology in economics. 1998): The rational expectations equilibrium model (Muth. Kahneman. The equilibrium concept in (micro-economic) game theory emphasising correct beliefs and Bayesian updates. 1957). However. argued that economics is not about human behaviour but about universal relationships between concepts. Three of these four rational approaches were purely theoretical and eliminated psychology. . Knight (1921). The rationality takeover in economics was spurred by four major developments (Laibson & Zeckhauser. The attack by Kahneman and Tversky (Kahneman & Tversky. 1919) and to provide a better psychological foundation for economics. Psychology was developing as a science during this period. The expansion of the eld of information economics (Akerlof. 1970). excluding a descriptive approach to expectation formation and change. 1982) was more successful. These approaches are also at the aggregate level and disregard individual behaviour and individual differences. excluding how people actually use information. both an economist and a psychologist. it excludes the need for psychology. Veblen is also instrumental in the ‘‘second wave’’ of economic psychology. emerged with his theory of bounded rationality (Simon. as Veblen’s opponent. The Slutzky-Hicks-Allen introduction of indifference curve analysis and the development of econometrics marked the failure of the introduction of psychology in economics during this period.

he focuses on the accuracy of describing their own and their partner’s tactics in joint economic decisions. happy spouses are more accurate in their description of their partner’s tactics. Van Veldhoven. For them it is thus easier to describe their partner’s tactics. Tyszka and Soko owska (this issue) describe the changes in socioeconomic preferences in the period of transition from a state-controlled central economy to a market-oriented economy in Poland. economic behaviour is studied. 1996). The disadvantages of the central economy seem to be quickly forgotten. This domain Wa consists of the consumer market place. . Accuracy of the descriptions is generally low: the partners are unable to describe the other partner’s tactics accurately. Consumer behaviour is often studied from a marketing perspective. This is an explanation for former communists regaining power in eastern European countries. generally. In this paper. in order to adapt products. and reactions to economic policy are problem areas of special concern ¨ rneryd. services. But marital happiness matters. and obtained support and a theoretical framework from social and cognitive psychology. Consumer Psychology Consumer psychology is the second part of the rst domain. because they are so similar to their own behaviour. Kirchler (this issue) studies joint economic decision making in households. and their marketing communication to consumer preferences. 1988). unemployment. concerned with consumer behaviour. including consumer behaviour. two contributions fall in this domain. and the disadvantages of the market economy are a vivid daily and sometimes painful experience now. poverty. and the citizen/society arena where economic relations such as social bene ts.268 VAN RAAIJ MICRO-ECONOMIC PSYCHOLOGY In the rst domain of economic psychology. for instance for consumer education by governmental agencies and consumer associations. Studies in this domain developed from pragmatics (Wa and intuition. Both partners are interviewed on the use of eighteen tactics in six purchasing con icts. Consumer behaviour is also studied from a consumer-protection perspective. taxes. micro-economic psychology. In this issue of Applied Psychology. They found only a weak support by people for the market economy. An explanation is that partners in happy couples are more congruent in their tactics than unhappy couples. the business arena and entrepreneurship (Antonides. The advantages of the market economy seem to be less visible for Polish citizens. and ¨ rneryd’s Handbook of Economic Psychology (1988). The third approach to consumer behaviour is a psychological perspective. An overview of this domain may be found in Van Raaij.

e. West Germans are less interested in products and services and less in uenced by advertising. product ownership. energy and nature conservation. West German consumers are less involved in consumption. Unemployment. They integrate the marketing and the psychological perspectives. Compared with East German consumers. Individual economic expectations related to spending. Family income and task allocation in the household. . In this issue. studies on consumer behaviour are not only applications of psychological theories. consumption experiences can be integrated and can be meaningfully understood. more ‘‘sophisticated’’ and focus more on abstract product attributes. Cram and Ng study consumer socialisation of children. social security bene ts. Grunert and Beckmann (this issue) compare East and West German consumers. ´ (this issue) study the patterns of emotional responses Maute and Dube to an unsatisfactory consumption experience and other post-purchase responses.INTRODUCTION 269 mainly a cognitive or a social learning perpsective (Antonides & Van Raaij. Many other topics in economic and consumer behaviour have both societal and theoretical value. They distinguish four patterns of emotional response with two structural dimensions: acceptance/calmness and anger/surprise. it is found that East German consumers adhere more to collectivistic values and West German consumers are more individualistic. and price. money as a medium of exchange. 1998). In this study. and consumer behaviour. from Rostock and Kiel. respectively. Information management in information overload situations.g. and credit. Three concepts provide children with a ‘‘mental scaffold’’ for interpreting consumer experiences. satisfaction and well-being. and learned helplessness. East German consumers focus more on concrete and functional product attributes and are more involved in their decision making. Research from different parts of the world indicates the crosscultural universality of the integrated model of scaffolding blocks. Consumption level. In order to avoid misperceptions. Environmental concern. Symbolic self-expression in purchasing and owning goods and brands. Once these three concepts are grasped. namely. the emotional responses after unsatisfactory experience. Their perception of food products is related to their values with a means–end approach. Examples are: New interactive media and information processing and choice. saving. both for managers and consumers. but are also instrumental in theory development in itself.

and for the functioning of the economy. next to economic concepts. trust) are needed at the aggregate level as compared to the individual level. the study of relationships between agrregates such as total income. and the framing of choice alternatives. Macro-psychological concepts are very relevant for economics. also belong to a certain extent to macro-economic psychology. and entrepreneurship. e. For many psychologists.e. The papers about the economic situation of consumers/citizens in Poland and the Eastern part of Germany by Tyszka and Soko owska. although they may have an equivalent at the individual level. and the psychological valuation of future . basic assumptions of economic theory are challenged. preference formation and change. Whereas in the second domain psychological concepts ful l an ‘‘additional’’ and ‘‘incremental’’ function in economic models. psychological theories and concepts replace the traditional economic theories and concepts. trust in the currency. indicating economic optimism and pessimism.g. This means that new and different concepts (con dence. psychological economics is more radical. this has severe consequences for spending and saving behaviour. innovativeness. and total savings. In psychological economics. and Grunert and Beckmann (this issue). These concepts are used at the aggregate level. although it ts very well with the models and approaches of economists. total consumption. An example is prospect theory (Kahneman & Tversky. Wa ¨ rneryd (this issue) discusses the role of macro-economic psychology. PSYCHOLOGICAL ECONOMICS The third domain is behavioural or psychological economics. The approach is often a macro-psychological approach. this is a new approach. These papers describe the consequences for consumers and citizens of the political-economic changes during the last ten years.e. during some periods entrepreneurship is negatively valued while in other periods it is perceived as more positive. respectively. Macro-economic psychology contributes to macro-economics. In psychological economics. it relates to aggregates rather than individuals. 1979) replacing standard utility theory. Aggregate relationships between concepts cannot always be found at the individual level.270 VAN RAAIJ MACRO-ECONOMIC PSYCHOLOGY Psychological factors in economic theories and models constitute the second domain. If economic pessimism prevails and trust in the currency is low. Relationships at the individual level may disappear at the aggregate level. 1975). i. These concepts evolve with the ‘‘culture’’ during a certain period. in utility theory and risky choice. Economic psychology contributes to this with macropsychological concepts such as the Index of Consumer Sentiment (Katona. i.

Prospect theory is now an accepted approach in the evaluation of gains and losses. such as in nancial economics. marketing. framing. in their roles of consumers.’’ These errors and biases are not random. CONCLUSIONS After this introduction. This way we obtain a better understanding of how people. savers. we make certain types of errors in judgement. As a result. rather than using secondary sources. (1982) show that the psychological factors. such as heuristics and biases. More and more. We may also better predict the outcomes of human information processing and choice in economic matters. It also provides a better psychological foundation for economics. are systematic and do not cancel out at the aggregate level. Kahneman and Tversky (1979) and Kahneman et al. There is a regularity and systematic bias in their perceptions and reasoning. But people are not irrational either. Economists often relied on secondary data. Some economists perceive psychological variables as individual differences that cancel out at the aggregate level. 1995). Another methodological approach in economics originating in psychology is ‘‘experimental economics’’ (Kagel & Roth. but have some regularity that can be detected and modelled. Behavioural economics is now accepted as a branch of economics. and psychology. Amos Tversky once explained his work by saying that ‘‘people use mental approximations to understand an uncertain world. investors. for instance. Psychological economics also focuses on psychological methodology in economics. for instance data collected by national bureaus of statistics. just like psychologists. Its main objective may be to show that people are not perfect and rational. especially data collection. contributing to a better understanding of social dilemmas and negotiation processes. react to economic stimuli in their environment. . and reasoning is another task of economic psychologists. Modelling the regularities in perceptions. or borrowers. use laboratory experiments to test relationships between variables. as is assumed in most economic models. in game theory and negotiation processes. economists now collect interview and questionnaire data themselves. It was ‘‘not done’’ to collect interview data directly from consumers or entrepreneurs.INTRODUCTION 271 outcomes replacing standard time discounting. Economists. it may be concluded that economic psychology is an active and useful branch of psychology at the interfaces of general and business economics. It is the task of economic psychologists to discover and model economic behaviours and their antecedents and consequences.

(1957). P. (1961). Wa Dordrecht. G. Amos Tversky and the ascent of behavioral economics.J. Method and appraisal in economics (pp. Criticism and the methodology of scienti c research programmes.272 VAN RAAIJ REFERENCES Akerlof. (1970). G. Judgment under uncertainty. (1988).-E. Heuristics and biases. 16.. G. The psychological foundation of economics: The history of consumer theory.F. W. A. 29. Consumer behaviour. (1975). New York: John Wiley.T. La psychologie economique.8–13). J. Huebsch. Quarterly Journal of Economics. Dordrecht.F.. Singapore: National University of Singapore.149–180).B. H. The Netherlands: Kluwer Academic.M. Handbook of economic psychology.B. & Tversky. Tarde.M. Kahneman. & K. Historical perspective in consumer research: National and international perspectives (pp. D. Antonides.). Kahneman. & Wa ¨ rneryd. Risk. Katona. Veblen. [in French]. W. Wa ¨ rneryd (Eds. (1982). UK: Cambridge University Press. (1919). Psychological economics. & Van Raaij. Economic psychology as a eld of study. Chichester. UK: John Wiley.). D. (1998). The market for ‘‘lemons’’. New York: Elsevier. Journal of Economic Psycology. Tarde. New York: Harper & Row.). (1902). (1979).. Latsis (Ed.. Antonides. A. Kagel. (1992).-E. G. New York: Cambridge University Press. Coats.). uncertainty and pro t. F. Slovic. Econometrica. Princeton: Princeton University Press. Muth. Prospect theory: An analysis of decision under risk.F. The theory of the leisure class. Psychology in economics and business (2nd Edn. Sheth (Eds. Van Raaij. Applied psychology: Newcomer with a long tradition. G. In W. Rational expectations and the theory of price movements.2–41). G. 47.W.F. W. R. 149–186. & Zeckhauser. Lakatos. 315–335. Econometrica. 263–291. J. 1–24. In S. (1981). D. Simon. A. 69. (Eds. & Roth. (1996). 629–650. Paris: Alcan [in French]. 90. Van Raaij. K. (1988). A. Handbook of experimental economics. W. Van Veldhoven. New York: Macmillan. Models of Man. (1976).. (1968). Proceedings of the Aristotelian Society.-E. Paris: Alcan [two volumes]. 5–66. 1. Les lois de l’imitation. (1998). The Netherlands: Kluwer Academic Publishers. Laibson. Van Raaij. Cambridge. K. Economic psychology. In C. Van Veldhoven. Economics and psychology: The death and resurrection of a research programme. Handbook of economic psychology (pp. Journal of Risk and Uncertainty. New York: B. Van Raaij. I. The place of science in modern civilisation. (1995)..A. (1899). Applied Psychology. T. .F.W. ¨ rneryd. (1980).). Tan & J. The Netherlands: Kluwer Academic Publishers.N. G.. G.. Dordrecht. & Tversky. Veblen. 42. W. Scho ¨ np ug. (1921). 7–47. A European perspective . Knight. T. (1985).

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