The Economic Consequences of Cognitive Dissonance

The Economic Consequences of Cognitive DissonanceGeorge A. Akerlof and William T. DickensAmerican Economic Review, 1982Presented by Amir Mohammad TahamtanGraduate School of Management and EconomicsSharif University of Technology

What is cognitive dissonance?Preferences(hedonic utility) shape behavior; or behavior shapes preferences?

a story from a book on Jewish folklore

3Why would members of the gang harass the tailor for free, but not for a penny?Wait for the answer!

First: dime, 10 CentsSecond: Nickel, (explaining that he could only afford a nickel that day) 5 Cents,Third: Well, a penny was not much of an incentive, and members of the gang began to protest.When the tailor replied that they could take it or leave it, they decided to leave it, shouting that the tailor was crazy if he thought that they would call him a Jew for only a penny!3

Cognitive DissonanceAn aversive psychological state (excessive mental stress and discomfort) aroused when there is a discrepancy between actions and attitudes:

Holding two or more contradictory cognitions (beliefs, ideas, values, emotions) simultaneously.Holding cognitions which do not match up with reality or experience. (I cant believe that .)Holding a belief and performing a contradictory action, reaction or behavior.What you are and what you should be, what you do and what you should do.4

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Associated EmotionsGuiltDreadAngerSurpriseEmbarrassment

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Examplessmoking

Purchasing decisions6

Using plastic products once and throwing them away

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Theory of cognitive dissonance7

Leon Festinger, 1957How humans strive for internal consistencybetween their expectations and their reality.

Basic Hypotheses"The existence of dissonance will motivate the person to try to reduce the dissonance and achieve consonance

"When dissonance is present, in addition to trying to reduce it, the person will actively avoid situations and information which would likely increase the dissonance.

8a powerful motive to maintain cognitive consistency can give rise to irrational and sometimes maladaptive behavior."Humans are not a rational animal, but a rationalizing one"

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Induced-compliance paradigm

When asked to rate the boring tasks at the conclusion of the study, those in the $1 group rated them more positively than those in the $20 and control groups. Festinger and Carlsmith argued that students who were paid only a $1 to lie to another person had experienced cognitive dissonance.Because .10

Dissonant CognitionsCognition #1: The tasks were extremely boring.Cognition #2: For only $1, I just told some one that the tasks were interesting and enjoyable.

1+2 = I lied for no good reason

I lied for a large sum of money

11Students were forced to internalize the attitude they were induced to express, because they had no other justification.Students had an obvious external justification for their behaviour, and thus experienced less dissonance.

what about the Jewish tailor?

He changed the gangs motivation from anti-Semitism to monetary reward, He made it inconsistent or dissonance-arousing for the gang to please him without financial compensation. Without a sufficiently large payment, the kids could no longer justify behaving at variance with their attitudes, which were, of course, to upset the tailor, not to make him happy.12Why would members of the gang harass the tailor for free, but not for a penny?

Dissonance Reduction processes

13Attitude: "I am going on a diet and will avoid high fat food.Behavior: Eating a doughnut or some other high fat food

1- Change behavior/ cognition

Adjust beliefs or values or even adjust their perception of realityStop eating the doughnutGiving up smoking

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VERY DIFFICULT

2- Rationalization (make excuses)changing the conflicting cognition: I'm allowed to cheat every once in a whileresearch has not proved definitely that smoking causes lung cancer

adding new cognitions: "I'll spend 30 extra minutes at the gym to work it off

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Justify behavior/cognition by

3-DenialIgnore/Deny any information that conflicts with existing beliefsI did not eat that donut. I always eat healthy.

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4- Trivialization

Any fool can despise what he can not get"live for today" than to "save for tomorrow."

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Free choice paradigmchoice-induced preference change Actions can alter an individuals preferences

After making a difcult choice between two equally preferred items, the act of rejecting a favorite item induces cognitive dissonance, which in turn motivates individuals to change their preferences to match their prior decision (i.e., reducing preference for rejected items)People no longer find the alternatives similarly desirable. They increase their preference for the selected option, decrease their preference for the rejected option or both. 18

Why is cognitive dissonance important?Life is filled with decisions, and decisions (as a general rule) arouse dissonance.Because it plays a role in many value judgments, decisions and evaluation.Becoming aware of how conflicting beliefs impact decision making process is a great way to improve your ability to make faster and more accurate choices.19

How is it related to economics?The theory of CD can be fairly represented in economists terms in three propositions:Persons not only have preferences over states of the world; but also over their beliefs about the state of the worldPersons have some controls over their beliefs; not only are people able to exercise some choice about belief given available information; they can also manipulate their own beliefs by selecting sources of information likely to confirm desired beliefsBeliefs once chosen persist over time

Some evidence on the second proposition Benzene workers denying that they were working with dangerous chemical substances (Ben-Horin, 1979).

All workers in a plant, some of whom were Ph.D.s, failed to wear safety badges to collect information on radiation exposure ; they were put in workers' desks and only brought out for the weekly checkup.

Failure for persons with high risk of flood or earthquake damage to purchase flood or earthquake insurance (Kunreuther et al. 1978).

Why workers underestimate the likelihood of dangers? Workers believe so, because:Therere some psychological benefitsTherere some costs (realizations of dangers)Workers choose to believe so and gain utility of their beliefs of the states of the world.Theres an implicit assumption that workers can choose whatever to believe given available information.The authors claim that: in most economic transactions, theres no need of rationalization and CD plays no role.

Description of the model: assumptions We have two periods:In the first period: Workers have a choice between working in a hazardous job or working in a safe jobThe worker will choose the job with the highest combined pecuniary and nonpecuniary benefitsWorkers in the hazardous industry have no choice but to face the possibility of an accident as there is no safety equipment availableIf the cost imposed by future wrong decisions is not too great, workers in the hazardous industry will, because of cognitive dissonance, come to believe that the job is really safe.In the second period:Cost-effective safety equipment becomes availableSafety legislation is needed to restore Pareto optimality since the workers have an incorrect assessment of the marginal rate of substitution between safety equipment and money income.

Description of the model: assumptions Both labor markets and product markets are competitiveWorkers begin with rational expectations:These workers know upon taking a job in the hazardous industry that they will experience cognitive dissonance and alter their estimated probabilities of accident.The Labor Market in the Safe Industry:The safe industry is pictured as large relative to the hazardous industryA job in the safe industry pays a fixed wage, denoted wsThis wage anchors the wage of workers in the hazardous industry in both periods 1 and 2.

The purpose of building such a "complete information" model is not realism; we would not expect people to be aware of their future behavior.6 Rather, the purpose of this assumption is to show that even in a model where workers entering a hazardous job perfectly foresee their future psychological reactions to the unsafe conditions, there may be a welfare- improving role for safety legislation. 24

Description of the model: assumptions The Demand for the Product and the Supply of the Product in the Hazardous Industry:The demand for the product of the hazardous industry in each period is given by a downward-sloping demand function D = D( ph )The good is produced by labor aloneOne worker produces one unit of the good in each periodThe producers are competitive, so that the supply of the good is infinitely elastic at the wage in each period

Description of the model: assumptions The Nonpecuniary Disadvantages of Work in the Hazardous IndustryWithout safety equipment, all workers in the hazardous industry have a probability q of accident in periods 1 and 2The cost of an accident to a worker is caa worker in the hazardous industry can purchase a new safety device which eliminates the possibility of an accident at a cost csqca > cs

Description of the model: assumptions

Description of the model: Equilibria

Description of the model: Equilibria

Description of the model: Equilibria

Description of the model: Equilibria

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The Equilibrium Discussed: Introduction of Safety Legislation

The Equilibrium Discussed: Introduction of Safety Legislation

Potential ApplicationSources of innovationAdvertisingSocial securityEconomic Theory of Crime