The Analysis of the Reflection of Decision-Making Biases on Macro-Level Well-Being: An International Behavioral Economic Study

Donev, Dávid (2020) The Analysis of the Reflection of Decision-Making Biases on Macro-Level Well-Being: An International Behavioral Economic Study. BA/BSc thesis, BCE, International Study Programs. Szabadon elérhető változat: http://publikaciok.lib.uni-corvinus.hu/publikus/szd/Donev_David.pdf

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Free and unrestricted access: http://publikaciok.lib.uni-corvinus.hu/publikus/szd/Donev_David.pdf

Abstract

The discipline of economics investigates the actions of decision makers. For a long time, mainstream economic models have assumed that humans act like analytical problem solvers of unconstrained cognitive capacities. However, with the inclusion of psychological insights, real humans’ cognitive boundaries and decision-making biases have been discovered. The study of these biases lead to the birth of the field of behavioral economics. Behavioral insights were found to have the potential for enhancing well-being. Thus, researchers, policymakers, and business leaders have started to show interest in the field. However, the majority of behavioral economic studies have been concerned with the examination of real humans’ biased decision making on the micro level, while the literature is relatively scarce in investigations carried out in a macro-level context. Hence, I decided to conduct an international behavioral economic analysis with the aim of examining the country-level reflections of decision-making biases. I built my paper around the following research question: How are decision-making biases reflected on the macro-level well-being of countries? In order to answer this question, I structured my study around three main pillars. The first pillar laid down the theoretical background through the overview of the scholarly literature. Firstly, I investigated the mainstream economic point of view on problem solving, and elaborated on the assumptions of unlimited rationality, self-interest, and willpower. On this ground, I examined the behavioral economic approach to bounded capacities and analyzed some of the resulting biases. These biases are loss aversion, originating from bounded rationality, fairness, resulting from bounded self-interest, and procrastination, the consequence of bounded willpower. As the next step, I investigated the economic and behavioral aspects of country-level well-being that may be impacted by these biases. Lastly, I provided a comparison of mainstream assumptions and behavioral extensions. The second pillar established the appropriate methodology for the subsequent analysis. As the first step, I elaborated on the adequate measurement of the biases of loss aversion, fairness, and procrastination, and inspected the macro-level measures of well-being of GDP per capita and happiness. Then, I detailed the three components of the integrated methodological approach: the graphical representation of relationships on scatter plots, the statistical identification of correlations through the measures of linear dependence, and the interpretation of the cause-and-effect relationships based on a meta-analysis. Lastly, I evaluated the suitability of the methodology by assessing its main strengths and weaknesses. I carried out the analysis of the problem on the basis of these two pillars. In the respective chapter, which is the third pillar of the present research paper, I concluded valuable findings on the reflections of biases, and gave an elaborate answer to the research question. The visualization on scatter plots and the examination of the measures of linear dependence demonstrated that biased behavior is present at the macro level, too. This part of the study yielded insights on the patterns of the reflection of biases on macro-level well-being. Firstly, the macro-level reflections of decision-making biases were found to be unique by bias, but similar across the two examined country-level measures of well-being. Secondly, fairness was found to be the only bias positively reflected on well-being. Thirdly, the reflections were more significant on happiness, the behavioral measure of country-level well-being, than on GDP per capita, the economic one, in the case of all three inspected biases. Moreover, the meta-analytical examination of the assumed underlying cause-and-effect relationships of the identified correlations provided specific conclusions for each bias. Firstly, loss aversion was found to be negatively reflected on the standard of living, assumably because loss-averse people tend to forego opportunities of uncertain outcomes, which behavior constrains economic development. Furthermore, a negative correlation was discovered between the bias and happiness, which possibly results from irrational pessimism. Secondly, the positive reflection of fairness was discovered on GDP per capita, presumably because fair decision makers focus their utility-maximizing effort on the macro level. Positive correlation was identified between the bias and happiness, assumably because people tend to be more satisfied with their lives if they and their peers are less self-centered. Thirdly, no significant correlation was found between procrastination and living standards, expectedly because high absolute, rather than high relative levels of this biased behavior affect decisions of economic importance. However, the negative reflection of the bias was discovered on happiness, presumably due to the resulting cognitive dissonance. This paper analyzed the reflections of biases originating from bounded rationality, bounded self-interest, and bounded willpower, on the measures of well-being of living standards and happiness. Through the conclusions drawn upon the patterns of the identified relationships and the findings on the assumed reasons behind the reflections of the biases on macro-level well-being, the study examined the research question of the paper and gave an elaborate answer to it. This way, it contributes to the scholarly literature of the field of behavioral economics, and also provides insights for policy-making and managerial purposes.

Item Type:BA/BSc thesis
Subjects:Economics
International economics
ID Code:13983
Specialisation:Economist in International Business
Deposited On:05 Oct 2021 09:13
Last Modified:02 Dec 2021 11:52

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