Yale Bulletin and Calendar

February 8, 2008|Volume 36, Number 17

Keith Chen

‘Non-standard economist’ exploring motivations behind buyers’ behavior

This article originally appeared in Q2, the second issue of Q(n), the magazine of the Yale School of Management (SOM). The publication can be found online at http://qn.som.yale.edu.

Yale SOM has become a leader in behavioral finance and behavioral economics.(See related story.)

These relatively new fields try to understand why people often fail to make fully rational decisions and how this can have important consequences for markets, firms and individuals. Behavioral research can help explain phenomena from why people don’t save enough money for retirement to how stock market bubbles are created — and, perhaps, help people avoid making mistakes.

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Ask most people what the typical economist studies, and monkey behavior, prison conditions and breast cancer probably won’t make the list. Keith Chen has studied all three.

“I’m more interested in slightly non-standard questions in economics than what is typically thought of as the core of our discipline. I’m most interested in thinking about puzzling behaviors that don’t make a tremendous amount of sense or that aren’t really well fleshed out in traditional economic thought,” says Chen, an assistant professor of economics at Yale SOM.

Chen’s research falls squarely into behavioral economics, a field that has come into its own only within the last 20 years. It blends classic economic theory with other disciplines, most notably social psychology and neuroscience, to investigate aspects of human behavior.

“What has happened within the last 20 years is that a growing number of economists have started to react to what was becoming a very ingrained, maybe somewhat dogmatic aspect of our discipline, which was the strict adherence to modeling the psychology of people in a very rational way,” Chen says.

“Behavioral economics,” he explains, “looks to other disciplines to make a more psychologically rich and real model of people as decision-makers, and then progresses beyond those disciplines to think about the implications. What happens when they’re embedded in markets? What do they mean for policy?”

Chen gained attention for his early behavioral experiments with monkeys. He and his co-authors taught monkeys in Yale’s Capuchin Cognition Laboratory to exchange money in the form of coin-like discs for rewards such as grapes and apples. The monkeys behaved much like humans with respect to using money, which suggests that certain behaviors and biases, such as loss aversion, are part of humans’ evolved psyche.

“What I try and show in my work with monkeys is the ways in which very funda?mental parts of our decision-making adhere to classic economic themes like cost and benefits, but simultaneously are both more innate and more complex than the traditional economic model would have us think,” says Chen.

Chen has since been back in the monkey lab investigating the endowment effect, a classic economic bias in which people tend to become attached to the status quo. He is also studying what parts of the brain are responsible for how people feel and respond to known risks versus uncertain risks, which has implications for finance, managerial decision-making and consumer behavior.

Chen hopes that his recent study of how prison conditions affect recidivism will lead to changes in how prison systems are designed. The research found that inmates who serve time in above-minimum security facilities are much more likely to commit crime and be re-arrested after release, and the types of crime that they commit are more violent.

“When you send people to harsher prison conditions, you just drastically increase their taste for violence,” says Chen.

“At any given time,” he adds, “more than two million Americans are sitting in jails, and every year we release about 600,000 people from that system back into society. We have direct control over the environment that people exist in while they’re incarcerated. This research is about understanding how we can be smarter about how we design our prison systems so those more than half a million people we release every year will be less likely to commit murder and more likely to re-enter society in a productive and meaningful way.”

Chen is currently studying how people think about their own health risks and how they decide whether to seek frightening information that may have important implications for their health behavior. He is examining this by studying women who believe they are immune from breast cancer because they pray and therefore do not need to get mammograms.

According to Chen, about 15% of the population as a whole answers “yes” to the question “Do you believe that if you pray, God will protect you from breast cancer?” That belief drops sharply if a relative gets cancer, whether it is a female relative who gets breast cancer or a male relative who gets liver cancer.

“A female relative with breast cancer increases your risk of getting breast cancer, but a male relative with liver cancer has nothing to do with your risk, and shouldn’t change how many mammograms you get. But what I find is that there is as large of a response of people willing to switch from prayer to mammograms in either scenario. And that makes sense because people have this meta-belief that they want to hold, which is that good people don’t need to get mammograms because good people don’t get breast cancer. That belief is harder to hold when you see people you love suffering from cancer.”

Behavioral economics and its unorthodox subjects, like those Chen studies, are gaining acceptance, but the field still has its skeptics.

“The majority of economists are still deeply suspicious of the behavioral approach,” says Chen. “And that’s actually one of the great strengths of our school. We have a rich intellectual environment that supports this relatively new way of thinking about the economy, about firms and about individual decision-makers.” (See related story.)

— By Tabitha Wilde

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