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Mental economics: Subjective representations of factors related to expected inflation
Abstract
This paper presents three different methods for obtaining and representing information about cognitive representations of economic variables. In the first study, variables considered related to a focal variable (inflation) were elicited. The second study presents numerical ratio scales for the strengths of relationships between different economic variables related to the focal variable. The third study gives a method for deriving causal chains of variables linked to each other so that a change in the first variable in the chain ultimately may lead to a change in the focal variable. The cognitive representation of this was mapped onto a causal tree structure. This study also presents causal chains for the effects of a change in the focal variable (viz., effects of inflation directly and indirectly). Although the paper was primarily methodological in character a few observations of differences between economists and non-experts were reported.
... The paper aims to analyze how these representations interact for students of different specializations (Business Administration and Sociology). In order to achieve this, the proposed path consists in partially adapting and refining a research methodology initially used for the elicitation of mental representation for the case of expected inflation (Svenson & Nilsson, 1986). ...
... The research methodology we have employed is based on a method proposed by Svenson and Nilsson (1986) in their study regarding expected inflation, aiming to explore the cognitive representation of inflation, the economic variables perceived as related to it and the relationships between them. ...
... Both statistical and graphical illustrations show significant differences for variables 2 (economic crisis), 5 (inflation rate) and 8 (consumption). The different appreciations on inflation were more than expected, taking into account the results obtained in the original study by Svenson and Nilsson (1986). They compared economics students with psychology students and concluded they have a different perceptual understanding of the causes and consequences of expected inflation. ...
The article tackles the analysis of the saving process by reviving a research methodology that explores mental representations and their economic implications. The conceptual background is updated to the latest interdisciplinary literature in behavioral economics and social psychology, extending the applications of construal level theory. The results are pointing out to a new way of understanding differences of opinion between groups (economists and sociologists) about saving behavior, usually considered irrational in the light of standard economic theory.
... Our paper is further related to the literature dealing with the influence of personal attributes and psychological factors on the formation of perceptions and expectations of macroeconomic aggregates as well as the literature dealing with news effects. Svenson and Nilsson (1986) and Leiser and Drori (2005) show that the depth of understanding of the term inflation differs enormously across socio-demographic groups and depends on mental as well as social representations. Malmendier and Nagel (2012) test for and verify cohort "imprintings", i.e. that households rely on inflation experiences early in their lifetime when forming expecations today. ...
... This result may be related to an increase in macroeconomic and financial literacy in higher education groups. Indeed, Svenson and Nilsson (1986) report significant differences in causal chains of psychological reasoning about inflation between people trained in economics and "economic laymen". Leiser and Drori (2005) evaluate literacy with respect to the concept of "inflation" across socio-demographic groups: The authors show that the core understanding of the concept "inflation" is quite similar across groups, while the depth of understanding differs strongly across educational levels. ...
We compare the formation of quantitative inflation perceptions and expectations from questions asked either in terms of price changes or in terms of the inflation rate in a new socio-economic household survey established at the University of Hamburg. In addition to socio-demographic characteristics, we evaluate effects of happiness, trust in people and the central bank, risk attitudes as well as news heard on monetary policy or inflation. We find that the upwards bias of reported perceptions and expectations is higher under the price wording and responses are more heterogeneous, but non-response rates are higher in the inflation wording. Generally, consumers have lower perceptions or expectations with a higher level of education, which also significantly lowers the probability of non-response. Consumers that perceived positive news on monetary policy or inflation also tend to give lower inflation estimates and vice versa. Additionally, our results suggest that happier individuals have significantly lower perceptions and expectations under the price wording, while more risk-averse consumers give significantly higher inflation estimates under the inflation wording.
... The purpose of the index is to yield a summary measure of the intensity of the crisis, also in the light of results in the literature on economic perceptions by ordinary people (see e.g. Svenson 1986, Baron 1994, Nicotra et al. 2001). Among the eligible economic variables, we have chosen three: real per capita disposable income, unemployment rate, and 'austerity' as given by a restriction of the public primary budget relative to GDP. 15 Whilst all these variables are consistent with academic definitions of crises, what is more relevant to our purposes is that they have an impact on personal lives, and that the relevant information is commonly accessible to ordinary people via the media. ...
The 'Five Presidents Report' cited in the title acknowledges that an important driver of the European economic crisis has been the faulty original design of the Monetary Union, and that substantial steps are urgently needed towards the creation of truly supranational institutions. Yet, economists tend to neglect that however compelling economic analyses may be, the stumbling block on the way of the reform of the Monetary Union is political will, and that in democracies the ultimate source of political will comes from electors. In this paper, first of all the authors wish to bring to the economists' attention some recent analyses of citizens' attitudes towards Europe from political science. Then, by cross-referencing the results of the 2014 elections of the European Parliament with Eurobarometer opinion polls eliciting judgements for the EU vis-à-vis home countries and an indicator of economic pain, the authors show the presence of a geo-economic-political cleavage across four groups of countries. This is more complex, and perhaps worse, than the simplistic divide between 'North' and 'South' or 'Core' and 'Periphery'. The main implication is that the EU experiences a stalemate between 'more Europe vs. less Europe' at the level of peoples, which seriously undermines support for further integration 'from below'.
... However, previous work also suggests that the disagreement in responses may reflect variations in how respondents interpret the Michigan Survey question about ''prices in general''. That is, some seem to interpret that question as asking about prices they personally pay, while others recognize it as asking about the US inflation rate (Bruine de Bruin et al., 2010), a concept with which members of the general public have some familiarity (Leiser & Driori, 2005;Svenson & Nilsson, 1986;Williamson & Wearing, 1996). ...
Economists and policy makers increasingly consult national household surveys asking individuals about their economic circumstances, financial decisions, and expectations for the future. For decades, the Reuters/Michigan Survey of Consumers and other national surveys have asked about expectations for “prices in general”, with responses being used by academic economists, policy makers, and central bankers. Although median responses track official inflation estimates, respondents exhibit considerable disagreement, with some reporting seemingly large overestimations. Here, we demonstrate that changes in the wording of survey questions about inflation expectations affect the central tendency of responses as well as their dispersion. We randomly assigned respondents to questions asking about “prices in general”, “inflation”, or “prices you pay”. Respondents’ expectations and perceptions were lower and less dispersed when questions asked about “inflation” instead of “prices in general” or “prices you pay”, with the latter two formulations eliciting similar response patterns. These question-wording effects were mediated by how much respondents thought of (extreme) personal price experiences when receiving questions about “prices in general” or “prices you pay”. Compared to questions about “inflation”, questions about “prices in general” and “prices you pay” elicited expectations that were more strongly correlated to expected increases in gas prices, which were relatively large and likely salient at that time.
... Because interpreting the question as asking about inflation seemed to be associated with less disagreement about question interpretation and with less extreme responses, a follow-up study examined the effect of asking directly for expectations of inflation rather than prices in general (Bruine de Bruin et al. 2012). Although the term inflation refers to a relatively complex concept, consumers tend to have a basic understanding of what it means (Leiser & Drori 2005, Svenson & Nilsson 1986. Respondents were randomly assigned to answering questions about their expectations for prices in general or inflation. ...
... However, previous work also suggests that the disagreement in responses may reflect variations in how respondents interpret the Michigan Survey question about ''prices in general''. That is, some seem to interpret that question as asking about prices they personally pay, while others recognize it as asking about the US inflation rate (Bruine de Bruin et al., 2010), a concept with which members of the general public have some familiarity (Leiser & Driori, 2005;Svenson & Nilsson, 1986;Williamson & Wearing, 1996). ...
... The survey drew on the topics revealed in the interviews and the wording used to describe them. This mental models approach has been used with topics as diverse as emergency contraception (Krishnamurti et al., 2008), chemical risk protection in the work place (Cox et al., 2003), inflation (Svenson and Nilsson, 1986), hurricane modification (Klima et al., in preparation), climate change (Bostrom et al., 1994;Sterman and Sweeney, 2007), as well as carbon capture and sequestration and other low-carbon electricity generation technologies (Fleishman et al., 2010;Palmgren et al., 2004). ...
With the enactment of the 2009 American Recovery and Reinvestment Act, U.S. President Obama made a public commitment to a new approach to energy production and transmission in the United States. It features installing smart meters and related technologies in residential homes, as part of transforming the current electrical grid into a “smart grid.” Realizing this transformation requires consumers to accept these new technologies and take advantage of the opportunities that they create. We use methods from behavioral decision research to understand consumer beliefs about smart meters, including in-depth mental models interviews and a follow-up survey with a sample of potential smart meter customers of a major U.S. mid-Atlantic electricity utility. In both the surveys and the interviews, most respondents reported wanting smart meters. However, these preferences were often based on erroneous beliefs regarding their purpose and function. Respondents confused smart meters with in-home displays and other enabling technologies, while expecting to realize immediate savings. They also perceived risks, including less control over their electricity usage, violations of their privacy, and increased costs. We discuss the policy implications of our results.
We describe two collaborations in which psychologists and economists provided essential support on foundational projects in major research programs. One project involved eliciting adolescents' expectations regarding significant future life events affecting their psychological and economic development. The second project involved eliciting consumers' expectations regarding inflation, a potentially vital input to their investment, saving, and purchasing decisions. In each project, we sought questions with the precision needed for economic modeling and the simplicity needed for lay respondents. We identify four conditions that, we believe, promoted our ability to sustain these transdisciplinary collaborations and coproduce the research: (i) having a shared research goal, which neither discipline could achieve on its own; (ii) finding common ground in shared methodology, which met each discipline's essential evidentiary conditions, but without insisting on its culturally acquired tastes; (iii) sharing the effort throughout, with common language and sense of ownership; and (iv) gaining mutual benefit from both the research process and its products.
In Kapitel 4 des Buches werden die in der Finanzwissenschaft gängigen Begründungen der Staatstätigkeit einer verhaltensökonomischen Betrachtung unterzogen. Dabei kann unter Bezug auf das Effizienzziel nicht nur gezeigt werden, wie psychologische Erkenntnisse zu ergänzenden Einsichten mit Blick auf die Bereitstellung öffentlicher Güter, die staatliche Internalisierung externer Effekte oder auch die Korrektur informationsbedingter Marktunvollkommenheiten durch den Staat führen. Zudem wird dargelegt, wie das verhaltensökonomische Konzept des asymmetrischen (libertären) Paternalismus zu einem grundlegenden Perspektivenwechsel in der finanzwissenschaftlichen Diskussion um die Bereitstellung meritorischer Güter beiträgt. Unter dem Verteilungsziel liefern darüber hinaus die Berücksichtigung sozialer Präferenzen – erklärt mit Hilfe von Verhaltensmotiven wie Altruismus oder einer Ungleichheitsaversion – ebenso wie Ergebnisse der ökonomischen Lebenszufriedenheitsforschung sowie psychologischer Untersuchungen zur Wirkung von Knappheit und Armut zusätzliche Argumente für eine Umverteilungspolitik des Staates. Unter dem Stabilisierungsziel sind es schließlich zum einen die Psychologie von Geld, Inflation und Finanzmärkten und zum anderen verhaltensökonomische Ursachen und Effekte von Arbeitslosigkeit, die zu einer Erweiterung der finanzwissenschaftlichen Perspektive in der Bewertung des staatlichen Handlungsbedarfs beitragen.
Effective risk communication requires an understanding of the audience's mental models of the underlying hazardous process. A method was developed for eliciting such mental models through structured, open-ended interviews. It was applied in interviews with 24 lay people asked to think about the risks from indoor radon. Results were used to design brochures intended to improve these mental models. In an experimental test, these brochures proved superior to a brochure currently in wide use.
Tested mathematical models of source credibility in 5 experiments in which 121 undergraduate judges estimated the value of hypothetical used cars based on blue book values and/or estimates provided by sources who examined the cars. The sources varied in mechanical expertise and in bias; they were described as friends of the buyer or seller of the car or as neutral. Individuals judged the highest price the buyer should pay, the lowest price the seller should accept, and the "true" value ("fair" price) of the car. Data indicate that expertise amplifies the effect of the source's bias. This effect was predicted by a scale-adjustment model in which the source's bias shifts the scale value of the source's estimate. The weight of an estimate depended chiefly on the source's expertise. The weight of an estimate also depended configurally on the other estimates: Judges instructed to take the buyer's point of view gave greater weight to the lower estimate, whereas judges who identified with the seller placed a greater weight on the high estimate. (17 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Reviews evidence which suggests that there may be little or no direct introspective access to higher order cognitive processes. Ss are sometimes (a) unaware of the existence of a stimulus that importantly influenced a response, (b) unaware of the existence of the response, and (c) unaware that the stimulus has affected the response. It is proposed that when people attempt to report on their cognitive processes, that is, on the processes mediating the effects of a stimulus on a response, they do not do so on the basis of any true introspection. Instead, their reports are based on a priori, implicit causal theories, or judgments about the extent to which a particular stimulus is a plausible cause of a given response. This suggests that though people may not be able to observe directly their cognitive processes, they will sometimes be able to report accurately about them. Accurate reports will occur when influential stimuli are salient and are plausible causes of the responses they produce, and will not occur when stimuli are not salient or are not plausible causes. (86 ref)
Presents an introduction to the theory, methodology, and findings of psychological economics, the study of the human factor in economic affairs. Ways in which past experiences, attitudes, and aspirations of consumers and businessmen alter their decisions to spend, save, and invest; psychological principles of consumer behavior; the psychology of inflation; and the relation between quality of life, social discontent, and consumerism are examined. (9 p ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
The purpose of this paper has been to compare research evidence related to consumer attitudes to specific price increases and to inflation as a general phenomenon with attitudes of British governments as expressed in government anti-inflation policies. In carrying out the enquiries the aim was to bridge the gap between economics and psychology. The findings indicate that the learning and relearning of prices in time of inflation presents considerable problems; so does communication between governments and the public. One message which would appear to have got through to governments is that of consumer discontent with rising prices. In response governments have at times introduced price restraint policies. The author suggests that the existence of inflation has shifted the focus of attention from satisfactions to dissatisfactions and that it may be necessary therefore to examine which factors are most important for consumer studies and for government policies: consumer attempts to maximize their satisfactions or their attempts to minimize their discontents?
Professional decision makers are the subject of two studies based on the assumption that prediction and explanation are not psychologically equivalent. The first study was designed to assess whether the complexity of decision makers' conception of the causes of inflation and unemployment matches that of their conception of the consequences of these events. The results of this study show that the subjects' conception of the causes are more complex than their conception of the consequences.The second study was designed to explore decision makers' conception of causes of past and future events (inflation and unemployment). The results of this study show that when explaining the past, subjects have a more complex conception of causes than when explaining the future. The results also show that subjects tend to evaluate the events negatively or positively to a greater extent in the future oriented task than in the past oriented one. Both studies together show that subjects generally have a more complex conception of the past than of the future. Hypothetical explanation to these results is presented.
Measuring the importance of cues in social judgment has been a longstanding problem. Past research has shown individual differences in the impact of ability and study effort on judgments of student performance. This research examined the hypothesis that the individual differences are due to the weight given to the information as opposed to the perceived extremity of the values of the information. Subjects judged the performance of hypothetical students described by ability, study effort, and effort during an exam. Individual differences in the impact of the three types of information were obtained and were predictable from self-reports of the relative importance of information. Different values of weights were necessary to account for the differences in the impact of information, although there were also differences in the perceived extremity of the information. The theoretical and applied significance of distinguishing the weight given to information in judgment from its subjective value are discussed. On the basis of a new review of the literature, as well as the present results, it is concluded that self-reports of the relative importance of information are predictive of individual differences in information use in judgment, but that they may reflect the total impact of information rather than only the weight.
A fictitious medical-diagnosis task was used to study how subjects integrate information when they do not know the correct integration rule, but only the relative weights to be given to the symptoms and the forms of the functions relating the symptoms to the diagnosis. The results showed: (a) that most subjects followed an additive integration rule, (b) that the subjects interpreted the weights for a symptom in terms of the slopes of the functions relating the symptoms to the disease, rather than in terms of variance accounted for, and (c) that the subjects were less skilled in following nonlinear rules than linear rules.