Emotions and Economics
George Loewenstein is a pioneer and founder of behavioral economics. He was one of the first to blend together the disciplines of psychology and economics and continues to be a leader in the field today. He has great insight into the nuances between our psyche and the decisions we make, which has allowed him to discover many of the cognitive biases that we discuss on our website. In particular, Loewenstein’s goal was to bring emotions back into the realm of economic theory, in order to understand their significant role in shaping human behavior.1 By taking human emotions into account, he strives to better understand the way that humans actually behave rather than rely solely on economic models. As a result of Loewenstein’s idiosyncratic views on the interdependence of psychology and economics, the field of behavioral economics continues to grow and enable us to adjust economic theories and models to become better predictors of imperfect human behavior.
George Loewenstein is the author of over 200 journal articles and various books. He is perhaps mostly recognized as the co-author of a 1989 paper Anomalies: Intertemporal Choice, which describes present-based biases. His work is often also related to discussions in affective forecasting, which examines how people predict their future emotional states.2 These ground-breaking insights deviate from rational economic models that fail to take into account human biases when making predictions.
Loewenstein is an economist, a neuroeconomist, a psychologist, an author, and an educator. He is a founder of multiple fields because he is unafraid to deviate from the norm. His curiosity into how mysterious emotions impact money and life-decisions has allowed an entire field to be created, one which he believes is only beginning to scratch the surface on how psychology and economics intersect.1 We owe much of the work that we do here, at The Decision Lab, to Loewenstein, who teaches us that we should not be afraid to step outside the box.
On their shoulders
For millennia, great thinkers and scholars have been working to understand the quirks of the human mind. Today, we’re privileged to put their insights to work, helping organizations to reduce bias and create better outcomes.
Anomalies: Intertemporal Choice
As mentioned, one of George Loewenstein’s most notable contributions to the field of behavioral economics was a paper that he co-authored with Richard Thaler. Thaler is also a behavioral economist with who Loewenstein has worked closely over the years. Anomalies: Intertemporal Choice examined how individual’s present-day decisions influence what kind of options would later be available to them in the future.4 In the abstract of the paper, Lowenstein and Thaler note that at the time at which the paper was published, economic behavior was distinguished from other behavior as being stable, easy to define, and consistently rational.5 The paper then attempted to present ‘anomalies’ to this widely held belief, in order to demonstrate the flaws of such an economic model.5
In particular, the paper was interested in the anomalies that existed in intertemporal predictions. Intertemporal choices can be defined as “decisions in which the timing of costs and benefits are spread out over time” (181) 5 which should in theory make predictions easier. These predictions usually use the discounted utility model, which suggests that people rationally weigh out the pros and cons of a decision, and ‘discount’ the desirability of an event depending on how much further in the future they are, but that this ‘discount’ is always tied to utility.6
Thaler and Lowenstein instead presented anomalies to this model. For example, one study that they explicate showed that participants wanted to receive a large sum of money in order to delay receiving lottery wins, but were unwilling to pay a lot in order to delay a parking ticket fine. If a discount was always determined by utility, these differences wouldn’t be found.
In another study, individuals were asked if they would prefer a free meal at a fancy French restaurant or at a local Greek restaurant. Initially, most participants chose the French restaurant, but when asked if they would prefer the French meal in two months, or the Greek meal in one month, half of the participants who had initially chosen the French restaurant switched to preferring the Greek meal which came sooner. The participants were therefore not acting based purely on utility, as the utility would be greater if they chose the restaurant that they actually preferred even though it would only be gained a month later. This study also provided evidence of bounded rationality, which suggests we make decisions that are ‘good enough’ instead of ‘best’.
The individual findings of the studies in the paper had different strakes for various economic principles, but the overarching conclusion of the paper was that often, “individuals violate certain assumptions of rational choice” (192) which meant that psychology needed to be incorporated into economic models to improve their relationship to reality.5
George Loewenstein is also often recognized for his contribution to affective forecasting. Affective forecasting is predicting how one will feel in the future and making decisions based on those predictions.2
Before behavioral economics, economic models predicted that humans have well-defined and stable preferences that would withstand the test of time. It would then follow that we would be good at predicting how we will feel in the future because it would be similar to how we feel now.
However, as Lowenstein demonstrated in a 2003 paper, alongside economists Ted O’Donoghue and Matthew Rabin, we often overestimate how much our future selves will be similar to our present selves. They summarized their findings in the projection bias, which identifies our inability to account for the powerful influence of emotions. We rely too heavily on our current mental state to inform us about our future selves, who will not always be influenced by the same emotions.
Such a forecasting error also coincides with the hot-cold empathy gap which describes our tendency to underestimate how much our current mental state influences our behavior. As Loewenstein stated in an interview, the problem is not just simply a matter of us being ‘too emotional’; it can also be that our present state is unemotional and forgets how much we could later be influenced by emotions.
Loewenstein’s work into affective forecasting demonstrates that people, like economic models, make forecasting errors based on the assumption that economic behavior is based on stable, rational, and well-defined preferences, such as utility. He, therefore, illustrates that economic models need to be reconfigured in order to incorporate the powerful force of emotions, which would allow them to more closely align with the way humans truly behave.
George Loewenstein was born on August 9th, 1955. It seems that an ability to found innovative disciplines was part of his DNA, as he is allegedly the great-grandson of Sigmund Freud, pioneer of psychoanalysis.7 He claims that he always had an interest in psychology due to his familial background, however, he decided to pursue economics and electronics in his undergraduate degree at Brandeis University.1 8 He graduated his with a BA in 1977, with honors, before pursuing a Ph.D. Although at this stage in his education, Loewenstein would have liked to study psychology, he knew that the prospects were unlikely, considering he hadn’t taken a single psychology course at Brandeis. He instead applied to do a Ph.D. in Economics at Yale, which he completed with distinction in 1985.8
Although formally enrolled in an economics doctorate, Loewenstein took advantage of any opportunity that allowed him to educate himself in psychology. He informally attended lectures and ensured that members of his committee were involved in the department.1 He then taught at the Booth School of Business at the University of Chicago before taking up his current position, Herbert A. Simon Professor of Economics and Psychology at Carnegie Mellon University.
Although it seems as though Loewenstein was destined for a career in economics and psychology, the world almost did not get the chance to benefit from his genius. Before completing his Ph.D. at Yale, he was about to become an electrical engineer with the promise of subsequent admission in an electronic engineering Ph.D. program at Stanford. Lucky for us, the job that promised him this opportunity would have required him to be stationed underground in Antarctica, and a psychiatrist determined that he would not have fared well in that situation, which lost him the job.1 But this was not the only time that Loewenstein almost deviated from the field; after graduating from Yale, he wasn’t getting many interviews because behavioral economics was not yet a recognized field. He was offered a brand manager position at a food company but before he could accept, he received the opportunity to teach at the University of Chicago.1
As mentioned, George Loewenstein has been greatly influenced by Richard Thaler, who is also considered one of the founders of behavioral economics. Loewenstein first met Thaler during his Ph.D. program, when he convinced the economics faculty at Yale to invite Thaler to give a seminar.1 Loewenstein has also been influenced by Daniel Kahneman and Amos Tversky, psychologists whose work he was introduced to thanks to Robert Abelson, a professor of psychology that was on Loewenstein’s Ph.D. committee.1 It is no surprise that George Loewenstein has bumped shoulders with such influential figures, as he stated in an interview that one of the skills required to be a good behavioral economist is to pick good collaborators.1
Lowenstein is married to Donna Harsh, a professor of History at Carnegie Mellon, and they have two children together, Max and Rosa.9 He continues to research the ways in which psychology can be applied to economics, with various interests ranging from how decision making changes over time, to the role of emotions in decision-making, to the psychology behind curiosity.10
Insights from George Loewenstein
As this thinker profile has explicated, Loewenstein’s work focuses on the way in which humans are not purely rational thinkers when it comes to their economic decisions. He urges economists to realize that “we are not dispassionate information processors. If we want to believe something, we’re amazingly adept at persuading ourselves that what we want to believe is true.”11
What this suggests is that human beings can’t control their behavior through rationality. As Loewenstein states, “there is little evidence beyond fallible introspection supporting the standard assumption of complete volitional control of behavior.” 12
Loewenstein shows that we do not always make the choice that gives us the greatest utility, or the best outcome. He states that, deviating from traditional economic models, “behavioral economics provides a framework for explaining why people behave in a self-destructive fashion. It’s more realistic about human behavior.” 11 While this may seem like a grim outlook on human behavior, Loewenstein believes greater insight into how psychology and economics intersect will allow us to better understand and predict our behavior.
However, despite being a pioneer in the field, just like the rest of us, Loewenstein is a victim of cognitive biases. When asked how he applies behavioral economics to his own personal life, Loewenstein stated: “I find that understanding an influence on one’s behavior does not go very far toward helping one to overcome it.”1
Where can we learn more?
George Loewenstein has an extensive list of publications, many of which are freely available on the internet. For example, if you were interested in his paper Anomalies: Intertemporal Choice, it can be found here. Oxford University Press has also compiled multiple papers by Lowenstein into the matter into a single book, published in 2002.
Loewenstein also worked with other important behavioral economists to compile somewhat of a manifesto for the field. Advances in Behavioral Economics is edited by Lowenstein, Matthew Rabin, and Colin Camerer, and assembles what they believe to be the most important papers published in the field starting around 1990.
As an educator, Loewenstein has also given various talks and seminars. In 2007, he gave a talk entitled The economist as therapist: Behavioral economics and light paternalism, where Lowenstein examines the methodological issues that arise in behavioral economics. For a list of all Loewenstein’s published talks, you can check out his Carnegie Mellon profile.
If you’d like to hear some of Loewenstein’s more recent theories, you can check out this podcast that featured him. Here, Loewenstein gives his take on boredom and the temporal nature of attention.
- Loewenstein, G. (2019, December 1). Interview with George Loewenstein. Interview by Money on the Mind. Money on the Mind. https://www.moneyonthemind.org/post/interview-with-george-loewenstein
- Psychology Today. (n.d.). Affective forecasting. Retrieved October 22, 2020, from https://www.psychologytoday.com/ca/basics/affective-forecasting
- Daris, J. (2015, November 23). Category: Quotes. Mrs. Daris’ Virtual Library. https://mrsdaris.weebly.com/blog/category/quotes
- Liberto, D. (2019, August 26). Intertemporal choice definition. Investopedia. https://www.investopedia.com/terms/i/intertemporalchoice.asp
- Loewenstein, G., & Thaler, R. (1989). Anomalies: Intertemporal Choice. The Journal of Economic Perspectives, 3(4), 181-193. https://www.jstor.org/stable/1942918?seq=1#metadata_info_tab_contents
- Behavioral Economics. (2019, April 1). Utility. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/utility/
- Kalson, S. (2008, February 6). Freud’s offspring lead noted lives. Pittsburgh Post-Gazette. https://www.post-gazette.com/ae/2008/02/06/Freud-s-offspring-lead-noted-lives/stories/200802060255
- Psychology Wiki. (n.d.). George Loewenstein. Retrieved October 22, 2020, from https://psychology.wikia.org/wiki/George_Loewenstein
- Zlatos, B. (2008, May 9). Newsmaker: George Loewenstein. TribLIVE.com. https://archive.triblive.com/news/newsmaker-george-loewenstein/
- Carnegie Mellon University. (n.d.). George Loewenstein – Social and decision sciences – Dietrich college of humanities and social sciences – Carnegie Mellon University. George Loewenstein. https://www.cmu.edu/dietrich/sds/people/faculty/george-loewenstein.html
- McGowan, K. (2010, January 24). #10: Economist George Loewenstein. Interview. Discover Magazine. https://www.discovermagazine.com/mind/10-economist-george-loewenstein
- Quotes.pub. (n.d.). Retrieved October 22, 2020, from https://quotes.pub/q/as-george-loewenstein-an-economist-at-carnegie-mellon-points-593620