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Introducing Cognitive Economics

The Economics of What is in People’s Minds

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Named by Analogy to “Cognitive Psychology”

• Cognitive Psychology = the area of psychology that examines internal mental processes such as problem solving, memory and language.

• Cognitive Psychology was a departure from Behaviorism--the idea that only outward behavior was a legitimate subject of study.

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How is “Cognitive Economics” Different from “Behavioral” or “Psychological” Economics?

1. Cognitive economics is narrower.

2. Much of cognitive economics is inspired by the internal dynamic of economics rather than by psychology.

3. Cognitive economics is a field of study, not a school of thought.

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Three Themes of Cognitive Economics

1.New Types of Data

2.Heterogeneity

3.Finite Cognition

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Three Themes of Cognitive Economics: Data

1. New kinds of data, especially new, innovative kinds of survey data:

• survey measures of expectations

• survey measures of preferences

• happiness data

• fluid intelligence data

• crystallized intelligence data – includes data on folk theories of economics

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Areas of Economics by Distinctive Data Type

• Standard Economics (including “Mindless” Psychological Economics a la Gul and Pesendorfer): actual market choices only.

• Experimental Economics: choices in artificial situations but with real stakes.

• Neuroeconomics: FMRI, saccades, skin conductance, …

• Bioeconomics: genes, hormones• Cognitive Economics: mental contents (based

on tests and self-reports) and hypothetical choices.

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Three Themes of Cognitive Economics: Heterogeneity

2. Individual Heterogeneity:

• heterogeneous expectations

• heterogeneous preferences,

• heterogeneous emotional reactions

• heterogeneous views on how the world works

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Three Themes of Cognitive Economics: Scarce Cognition

3. Finite and scarce cognition:

• Finite cognition=the reality that people are not infinitely intelligent.

• Scarce cognition=some decisions required by our modern environment can require more intelligence for full-scale optimization than an individual has.

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“Bounded Rationality” vs. “Scarce Cognition”

• Same meaning, but “bounded rationality” seems a misnomer, since it is rational to recognize one’s own cognitive limitations.

• Two obstacles have prevented “Bounded Rationality” from becoming part of the mainstream– paucity of data– theoretical difficulties stemming from the importance

of constrained optimization as a theoretical tool in economics

• “Scarce Cognition” is meant to label a data-rich research agenda, using new theoretical tools.