While preparing my applications for graduate studies in Economics, I noticed that most of the programmes are male-dominated. They tend to have a 70-30 (male-female) distribution or less. Considering that the majority of those enrolling at university nowadays are female (Royal Economic Society, 2014), this is a rather striking result. What is more, following the reasoning of Akerlof and Kranton in their 2011 book Identity Economics, such a gender dominance may take a long time to reverse if the minority group is deterred from entering the profession. A recent article also highlights why society would benefit from an increase in females choosing a career economics:
In the article, Victoria Bateman – a lecturer and fellow in Economics at the University of Cambridge – aptly notices:
While economists like to think of their discipline as being gender neutral, the reality is that economists have looked at the world around them through male eyes – and rather privileged male eyes at that.
While Economics investigates gender gaps in a variety of settings, our profession has yet to raise awareness of its own gender gap, taking more measures to encourage females to choose a career in Economics.
Akerlof, G.A., and Kranton, R.E. (2011). Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being. Princeton: Princeton University Press.
It has been a bit quieter on my blog over the exam period and the Christmas break, but now university is back on again and I cannot wait to start my second semester! As we have our consolidation and development week this week, it seems like the perfect time to prepare for my classes and as the semester is going to be my last one before graduation, I can pick from a list of electives.
So, besides Behavioural Economics and Industrial Economics, I get the chance to do Applied Econometrics. The course builds upon the Econometrics component from my third-year classes in Micro- and Macroeconomics and introduces:
Models with limited dependent variables
Panel data sets
Topics involving time series data (volatility and cointegration).
One of the class prerequisites is a change in notation to the matrix form of econometrics. This is a very useful step as many econometric problems have a multivariate character and for this, the matrix form is much more convenient. While I have studied matrices in my advanced mathematics course as well as through MITOpenCourseware, I have yet to relate it to econometrics and this is what I am up to this week! Ben Lambert has a great graduate course in econometrics on his YouTube channel which covers topics from the undergraduate course in matrix formulation:
It is an indispensable source for developing your understanding and getting a feel for this representation. In particular, the course starts with an introduction to the matrix formulation of econometrics, followed by an example of it. It then continues with the differentiation with respect to a vector as well as the derivation of OLS estimators in matrix form. So, if you want or need to refresh your econometrics skills or develop them to the next level, this is for you.
In today’s post, I want to review the role of emotion in economic behaviour as emotions used to play an important part in Economics. Jeremy Bentham, for example, who is regarded as the founder of modern utilitarianism, gave emotions a prominent role in the decision process and viewed the concept of utility as the sum of emotions. Yet neoclassical economics abstracts utility from its psychological foundations (Loewenstein, 2000). Undergraduate students of Economics, in particular, familiarise with the representative economic agent as a rational and self-interested individual who deploys pure logic to maximise her utility. Insights from behavioural research rarely make it into an Introductory Microeconomics course. Yet more descriptive realism – particularly at undergraduate level – might help to arouse the students’ interest in the field.
So, let’s start with the neoclassical view on emotions in economic behaviour. Standard economic models are consequentialist in nature (figure 1), meaning that choice is modelled as a cognitive process of utility maximisation. This does not rule out the influence of emotions in the decision process as consequentialist models can account for expected emotions, i.e. emotions which the decision-maker anticipates to experience because of her decision. Emotions experienced at the point of decision-making, however, are difficult to capture in these models as the decision-process itself is some form of expectation-based calculus.
After making the decision
Related to the decision
At the point of decision-making
Related to the decision
At the point of decision-making
Unrelated to the decision
Table 1 The different types of emotions in decision-making
In contrast, behavioural research has identified two types of immediate emotions which are important for understanding an individual’s choice but which are typically neglected in the neoclassical view (see table above). First, there are integral emotions. They are related to the decision at hand and arise from thinking about the decision’s consequences. As shown in figure 1, consequentialist models can, in fact, be extended to incorporate this type of emotions as there is a causal link between the decision and this type of immediate emotions. Second, there are incidental emotions which are also experienced at the point of decision-making but which are unrelated to the decision, arising from situational influences and visceral factors (Rick and Loewenstein, 2008). Yet because incidental emotions are irrelevant to the decision, they are difficult to capture in the consequentialist perspective. What is more, economists tend to refrain from incorporating visceral factors in their analyses as (1) “visceral factors often drive people to behave in ways that they view as contrary to their own self-interest” and as (2) “people tend to underestimate the impact of visceral factors on their own current and future behaviour” because these complications run counter to the view that decision-making is a cognitive process (Loewenstein, 2000, p.428). Fortunately, with the rise of behavioural economics, integral and incidental emotions re-enter economic analyses. Starting with counterfactual emotions such as regret, more realistic models of behaviour emerge which re-connect emotions and utility. In the last few years, in particular, one can see a rethinking in economic modeling, for example, with the risk-as-feelings hypothesis by Loewenstein, Weber, Hsee and Welch (2001).
In sum, expected, integral and incidental emotions play an important role in economic behaviour and with a shift towards more psychologically realistic assumptions, they re-enter economic models.
Many thanks for reading; I hope you enjoyed today’s topic!
Loewenstein, G.F. (2000). Emotions in Economic Theory and Economic Behaviour. Preferences, Behaviour, and Welfare, 90(2), pp. 426-432.
Loewenstein, G.F., Weber, E.U., Hsee, C.K. and Welch, N. (2001). Risk as Feelings. Psychological Bulletin, 127(2), pp. 267-286.
Rick, S., and Loewenstein, G.F. (2008). The Role of Emotion in Economic Behavior. In: M. Lewis, J.M. Haviland-Jones, L.F. Barrett (Eds.). Handbook of Emotions (3rd ed.). New York: Guilford Press.