Comment on Ken Arrow: The social determination of behavior

Karla Hoff

The standard model assumes a rational actor

Stable & autonomous preferences

Market

Autonomous people

Under some conditions: Perfect competition No missing markets No asymmetric

information

The Fundamental Theorems of Welfare Economics

The 1st theorem The competitive economy is always Pareto efficient. The 2nd theorem Every Pareto efficient allocation is a competitive equilibrium for some distribution of purchasing power. Arrow 1951

The assumptions in economics about how individuals make decisions have become contested

--Kahneman 2011

Thinking fast & neglect of ambiguity

Kahneman 2011

1990s—Psychology departs from universals in cognition

The human mind is a pattern-matching machine Categories and other mental models help us process information and sort the world into easer-to-read patterns Definition of culture: the set of mental models that we use to process information:

They shape attention, construal, memory, & emotion responses They include inconsistent representations.

Example from Brazil: Soap operas of societies with low fertility

• A company deliberately crafted soap operas with characters who had few or no children

• The fertility decline in a municipality began after the first year the municipality had gained access to the TV soap operas.

• The decline was greatest for respondents close in age to the leading female character

• For women of age 35–44, the decrease was 11% of mean fertility.

• Causal identification: based on the arguably random timing when different parts of Brazil obtained access to the TV emissions

La Ferrara et al. 2012

Jensen (2012) hired 8 call center recruiters and sent them to 80 villages

Randomized controlled trial in 160 villages in India

• One day per year, for 3 years, one information session was held

• 3 years of continuous placement support to women, by phone

• 11 job matches on average per village over 3 years

• Proportion of young women with call center jobs increased from 0 to 5.6 points

Social impact on women of age 15-21

Markets with call center recruiters in the village

Recruiter Sellers

• Proportion married drops (71% control, 66% treatment)

• Proportion with children drops (from 43% to 37%)

Social impact on women of age 15-21 & on girls

Markets with call center recruiters in the village

Recruiter Sellers

• Proportion married drops (71% control, 66% treatment

• Proportion with children drops (from 43% to 37%) • BMI of girls

The treatment closed 30% of the gap between village girls and the wealthiest residents in Delhi

Social rigidity

Because social experience shapes stereotypes, prototypes, and other mental models, society can be rigid.

Example: 2 mental models of parents’ utilty gains from educating a daughter, VP & VA .

Hoff and Stiglitz 2016

Distribution of benefits to parents from an uneducated daughter • .

. • .

Market outcomes can affect who we are.

Markets shape how we think—they have a “schematizing role”

Standard Economics

The rational actor

Guided by • Incentives

Standard Economics Behavioral Economics

The rational actor

The quasi-rational actor

Guided by • Incentives

Also guided by • Context in the moment of

decision under “fast” thinking

Source: Kahneman 2011

Standard Economics Behavioral Economics Strand One Strand Two

The rational actor

The quasi-rational actor

The enculturated actor

• Endogenous preferences • Endogenous cognition • Endogenous perceptions

Guided by

incentives

Also guided by

context in the moment of decision

(primes, frames)

& also guided by

experience & exposure that create mental models, e.g.

• Prototypes • Narratives • Concepts • Identities

Thank you.

Extra slides

New paradigm with the enculturated actor

Preferences & cognition depend on

Experiences/exposure that shape the tools with which we process information

Primes & frames

A big social change can happen if enough people change their way of look at things at about the same time from, e.g.

Shocks to demand Soap operas & theater for development;