Abstract
Canonical economic agents act so as to maximize a single, representative, utility function. However, there is accumulating evidence that heterogeneity in thought processes may be an important determinant of individual behavior. This paper investigates the implications of a vector-valued generalization of the Expected Utility paradigm, which permits agents either to deliberate as per Homo economics, or to act impulsively. This generalized decision theory is applied to explain the crowding-out effect, irrational educational investment decisions, persistent social inequalities, the pervasive influence of non-cognitive ability on socio-economic outcomes, and the dynamic relationships between non-cognitive ability, cognitive ability, and behavioral biases. These results suggest that the generalized decision theory warrants further investigation.
Highlights
Neoclassical Expected Utility Theory explains all individual differences as the result of heterogeneity in tastes
These include: chronic unemployment, strong inter-generational persistence of social inequalities, dynamic complementarity between cognitive and non-cognitive abilities, divergent developmental pathways dependent upon small changes in early-life experiences, and an explanation for the observed relationships between IQ, Cognitive Reflection, behavioral biases, and other social outcomes. These findings suggest that the generalized decision theory has the potential to improve our understanding of specific behavioral anomalies, and to bring together diverse strands from the existing literature
Whilst a deliberative thought process must account for the long-term returns to education, we propose that a child who acts impulsively might not even consider those returns
Summary
Neoclassical Expected Utility Theory explains all individual differences as the result of heterogeneity in tastes. One possible explanation is contributed by Bénabou and Tirole (2006), who derive a crowding-out effect by assuming the existence of a third utility component to enumerate individuals’ social reputation This approach is innovative, but it requires an additional layer of assumptions, and it is highly situation specific. When incorporated into the model presented, it suggests that short-run cognitive skill development could be ensured by a sufficiently large incentive, but that this benefit may be offset in the long run, since that same intervention could preclude the development of the child’s non-cognitive skill (their propensity to deliberatively engage with educational opportunities) This explanation of the crowding-out effect, supports the stereotypical teacher’s intuition that effective interventions should develop a child’s conscientiousness, both by explicitly teaching and implicitly demonstrating a deliberative decision-making processes
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