Consumer choice

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Consumer_choice 

The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption (as measured by their preferences subject to limitations on their expenditures), by maximizing utility subject to a consumer budget constraint. Factors influencing consumers' evaluation of the utility of goods include: income level, cultural factors, product information and physio-psychological factors.

Consumption is separated from production, logically, because two different economic agents are involved. In the first case, consumption is determined by the individual. Their specific tastes or preferences determine the amount of utility they derive from goods and services they consume. In the second case, a producer has different motives to the consumer in that they are focussed on the profit they make. This is explained further by producer theory. The models that make up consumer theory are used to represent prospectively observable demand patterns for an individual buyer on the hypothesis of constrained optimization. Prominent variables used to explain the rate at which the good is purchased (demanded) are the price per unit of that good, prices of related goods, and wealth of the consumer.

The law of demand states that the rate of consumption falls as the price of the good rises, even when the consumer is monetarily compensated for the effect of the higher price; this is called the substitution effect. As the price of a good rises, consumers will substitute away from that good, choosing more of other alternatives. If no compensation for the price rise occurs, as is usual, then the decline in overall purchasing power due to the price rise leads, for most goods, to a further decline in the quantity demanded; this is called the income effect. As the wealth of the individual rises, demand for most products increases, shifting the demand curve higher at all possible prices.

In addition, people's judgments and decisions are often influenced by systemic biases or heuristics and are strongly dependent on the context in which the decisions are made, small or even unexpected changes in the decision-making environment can greatly affect their decisions.

The basic problem of consumer theory takes the following inputs:

• The consumption set C – the set of all bundles that the consumer could conceivably consume.
• A preference relation over the bundles of C. This preference relation can be described as an ordinal utility function, describing the utility that the consumer derives from each bundle.
• A price system, which is a function assigning a price to each bundle.
• An initial endowment, which is a bundle from C that the consumer initially holds. The consumer can sell all or some of his initial bundle in the given prices, and can buy another bundle in the given prices. He has to decide which bundle to buy, under the given prices and budget, in order to maximize their utility.

Behavioral economics

Behavioral economics has criticized neoclassical consumer choice theory because reality is more complex that what the theory can determine itself.

Firstly, consumers use heuristics, which means they do not scrutinize decisions too closely but rather make broad generalizations. Further, it is deemed not worthwhile to attempt to determine the value of specific behavior. Heuristics are techniques for simplifying the decision-making process by omitting or disregarding certain information and focusing exclusively on particular elements of alternatives. While some heuristics must be utilized purposefully and deliberately, others can be used relatively effortlessly, even without our conscious awareness. Consumption by individuals is typically impacted by advertising and consumer habits as well.

Secondly, consumers struggle to give standard utils and instead rank distinct options in order of preference, which is referred to as ordinal utility.

Thirdly, it is not always likely that a consumer would stay rational and make the choice which maximizes their utility. Sometimes, individuals are irrational. For example, a consumer making impulsive purchases is not a rational choice. The rise of the internet and social networks may cause changes in consumer behavior, resulting in more planned and sensible purchase processes.

Fourthly, individuals can be reluctant to spend cash on particular items because they have preconceived boundaries on how much they can afford to spend on 'luxuries,' according to their mental accounting.

Lastly, it is not easy to separate products in the market. Some items, such as an electronic car or a refrigerator, are only purchased occasionally and cannot be mathematically divided.

Example: homogeneous divisible goods

Consider an economy with two types of homogeneous divisible goods, traditionally called X and Y.

• The consumption set is ${\displaystyle R_{+}^2}$, i.e. the set of all pairs ${\displaystyle (x,y)}$ where ${\displaystyle x\ge 0}$ and ${\displaystyle y\ge 0}$. Each bundle contains a non-negative quantity of good X and a non-negative quantity of good Y.
• A typical preference relation can be represented by a set of indifference curves. Each curve represents a set of bundles that give the consumer the same utility. A typical utility function is the Cobb–Douglas function: ${\displaystyle u(x,y)=x^{\alpha }\cdot y^{\beta }}$, which is shown in the figure below.
• A typical price system assigns a price to each type of good, such that the cost of bundle ${\displaystyle (x,y)}$ is ${\displaystyle x{p}_X+y{p}_Y}$.
• A typical initial endowment for an individual is fixed income, which along with transparent prices of goods implies a budget constraint. The consumer can choose any point on or below the budget constraint line ${\displaystyle BC}$ In the diagram. This line is downward sloped and linear since it represents the boundary of the inequality ${\displaystyle x{p}_X+y{p}_Y\le \mathrm{i}\mathrm{n}\mathrm{c}\mathrm{o}\mathrm{m}\mathrm{e}}$. In other words, the amount spent on both goods together is less than or equal to the income of the consumer.

The consumer will choose the indifference curve with the highest utility that is attainable within their budget constraint. Every point on indifference curve I3 is outside the budget constraint. As a result, the most optimal point for the individual is where the indifference curve I2 is tangent to the budget constraint. As a result, the individual will purchase ${\displaystyle X\ast }$ of good X and ${\displaystyle Y\ast }$ of good Y.

Indifference curve analysis begins with the utility function. The utility function is treated as an index of utility. All that is necessary is that the utility index change as more preferred bundles are consumed.

The tangent point between the indifference curve and the budget line is the point at which consumer satisfaction is maximized.

Indifference curves are typically numbered with the number increasing as more preferred bundles are consumed. The numbers have no cardinal significance; for example, if three indifference curves are labeled 1, 4, and 16 respectively that means nothing more than the bundles "on" indifference curve 4 are more preferred than the bundles "on" indifference curve 1.

The income effect and price effect explain how the change in price of a good changes the consumption of the good. The theory of consumer choice examines the trade-offs and decisions people make in their role as consumers as prices and their income change.

Characteristics of the indifference curve

Indifference curves are heuristic devices used in microeconomics to convey preferences of a consumer graphically along with the limitations of a consumer's budget.

An indifference curve shows the various combination of two goods that leave the consumer equally satisfied. For example, every point on the indifference curve I1 (as shown in the figure above), which represents a unique combination of good X and good Y, will give the consumer the same utility.

Indifference curves have a few assumptions that explain their nature.

Firstly, indifference curves are typically convex to the origin of the graph. This is because it is assumed that a given consumer will sacrifice consumption in one good for more consumption of the other good. Thus, the marginal rate of substitution (MRS), which is the slope of the indifference curve at any single point along the curve, will decrease when moving down a given indifference curve. Indifference curves can also take various other shapes depending on the preferences of the consumer.

Secondly, for a given consumer, their indifference curves cannot intersect each other. This is because the same set of consumption for a given individual cannot represent two different utility values.

Thirdly, it is assumed that individuals are more satisfied with a bundle of goods on an indifference curve that is further away from the origin. From the graph above, the indifference curve I3 would give the consumer the highest utility whereas I1 would give the lowest utility.

The indifference curves shown in the figure above adhere to the three assumptions outlined in that they are convex, do not intersect, and have a higher utility the further the indifference curve is away from the origin.

Example: land

As a second example, consider an economy that consists of a large land-estate L.

• The consumption set is ${\displaystyle P(L)}$, i.e. the set of all subsets of L (all land parcels).
• A typical preference relation can be represented by a utility function which assigns, to each land parcel, its total "fertility" (the total amount of grain that can be grown in that land).
• A typical price system assigns a price to each land parcel, based on its area.
• A typical initial endowment is either a fixed income, or an initial parcel which the consumer can sell and buy another parcel.

Sunk cost effect

According to the laws of economic logic, sunk costs and making decisions should be irrelevant. However, there is a widespread irrationality in people's actual investment activities, production and daily activities that takes sunk costs into account when making decisions.

Sunk costs for individuals may be represented by behaviour in which they make decisions based on the fact that they have paid for this good or service irrespective of current circumstances. An example of this is a consumer who has already purchased their ticket for a concert and may travel through a storm to be able to attend the concert in order to not waste their ticket.

Another example is different payment schedules for gym members may result in different levels of potential sunk costs and affect the frequency of gym visits by consumers. That is to say, the payment schedule with other less frequent (e.g., quarterly, semi-annual or annual payment schedule), compared to a month pay the fee to the gym in a larger, these factors to reduce the cost and reduce the psychological sunk costs, more vivid sunk costs significantly increased people's gym visits. In summary, the behaviour of consumers in these two examples can be characterised by their ideal that losses loom larger than gains.

Role of time constraint effect

Highly relevant to the study and understanding of consumer choice is the role of time contraint effects. This effect is related to the available time consumers have before making their decision on whether to buy a product or service and which product or service to buy. With the incessant exposure consumers have to businesses through the avenues of social media, television, billboards and radio, time constraint effects can significantly impact the decision-making process of these consumers.

Examples of Screen Shots for Set Sizes 4, 9 and 16

A study was conducted to measure the computational processes of subjects when faced with a decision to choose a product from a bundle of slightly differentiated products, whilst faced with a time constraint. The study was conducted through an experiment in which participants were in a supermarket-like environment and were asked to pick a snack food item from a screenshot out of a set of either 4, 9 or 16 similar items with a 3-second time window.

The results show that consumers are typically good at optimizing items that they have seen within the search process, i.e., they can easily make a choice from the "seen-set" of items. The results also show that consumers mostly use the hybrid model as a computational process for consumer choice. The data is most qualitatively consistent with the hybrid model rather than the optimal or satisfying models.

This reliance on impulsive data however isn't necessarily representative of today's market, throughout the pandemic consumers where largely forced to use online shopping methods making browsing between competitors easier, allowing for indulgence in research and conversations outside of the retailers control and evaluation of the need for a product to be completed at the individuals pace. This indicates that the time constraint effect may be less controlling of consumers choice than initially discussed.

However, important consideration should be made based temporal effects of a purchase. A study found that consumers often fall into a prevention-promotion mindset depending on the urgency of a decision. A prevention mindset comes from the need for your goals to align with your responsibilities. A promotion mindset revolves around the experience of new things. When faced with a purchase consumers were found to adopt the prevention mindset however when the purchase was distant a promotion mindset was adopted.

In conclusion the role of the time constraint effect on consumer choice is highly relevant when informing consumer choices. With the ability to extend the time constraint by using remote shopping consumers can often make a more informed decision however when the time for purchase arrives consumers often fall into a prevention focus mindset.

Effect of online reviews

During the online shopping process, retailers encourage customers to share their product reviews on digital platforms such as e-commerce websites and social media, which in turn helps other shoppers to have a better understanding of the product. Online consumer reviews play a crucial role in providing product information before consumers make a purchase decision. These reviews, full of desires, preferences and behavioural insights, are a valuable source of data for both consumers and businesses. By understanding consumer behaviour and preferences, businesses can develop strategic plans to improve the quality of their services and tailor their offerings to better meet the needs of their customers.

For example, when consumers do an online search for hotels, they can compare prices, locations, services and other aspects of various potential hotels on the site. The platform can also provide personalised recommendations based on a user's search history and preferences. Based on the attributes listed for each hotel, consumers can make an informed decision that is influenced by the consistency between their perceived hotel performance and their preferences – a classic multi-attribute decision making (MADM) problem. Vocabulary-based sentiment analysis is incorporated into online reviews to create product rankings that take into account the sentiment score of the review, the brand ranking of the product and the usefulness of the review.

In the context of travel, travellers' choices and behaviours when selecting restaurants are heavily influenced by their travel classification or purpose, such as leisure, business or adventure. The study's modelling results suggest that travellers show diverse preferences in terms of dining behaviour, depending on factors such as environment, type of cuisine, price range and dietary restrictions. While the study provides valuable insights into restaurant decision-making, it also acknowledges limitations and suggests other directions for research to further explore consumer preferences in various contexts.

However, the sheer volume of online reviews and the need to consider various attributes when making decisions can be overwhelming for consumers. In many cases, it can be a challenge to discern genuine reviews from fake ones or marketing-driven content. Therefore, tools and methods must be developed to help consumers make informed choices by helping them rank product candidates based on other consumers' reviews and their preferences. The use of artificial intelligence and machine learning algorithms has the potential to help sift through large amounts of data, extract useful insights and provide personalised recommendations to consumers.

In short, online consumer reviews are an important resource for shoppers and businesses alike. Using this information can help businesses better understand consumer preferences, improve their offerings and ultimately increase customer satisfaction. For consumers, having access to aggregated, relevant and trustworthy information can greatly enhance their decision-making process and overall online shopping experience.

Effect of a price change

The indifference curves and budget constraint can be used to predict the effect of changes to the budget constraint. The graph below shows the effect of a price increase for good Y. If the price of Y increases, the budget constraint will pivot from ${\displaystyle BC2}$ to ${\displaystyle BC1}$. Notice that because the price of X does not change, the consumer can still buy the same amount of X if he or she chooses to buy only good X. On the other hand, if the consumer chooses to buy only good Y, he or she will be able to buy less of good Y because its price has increased.

Now, the consumption of good X and Y will be re-allocated to account for the price change in good Y. To maximize their utility, the consumption bundle that is on the highest indifference curve that is tangent to ${\displaystyle BC1}$. This consumption bundle is now (X1, Y1) as shown in the figure below. As a result, the amount of good Y bought has shifted from Y2 to Y1, and the amount of good X bought has shifted from X2 to X1. The opposite effect will occur if the price of Y decreases causing the budget constrain to shift from ${\displaystyle BC2}$ to ${\displaystyle BC3}$, and the highest indifference curve that maximises the consumers utility shifts from I2 to I3.

If these curves are plotted for many different prices of good Y, a demand curve for good Y can be constructed. The diagram below shows the demand curve for good Y as its price varies. Alternatively, if the price for good Y is fixed and the price for good X is varied, a demand curve for good X can be constructed.

Income effect

The income effect is the phenomenon observed through changes in purchasing power. It reveals the change in quantity demanded brought by a change in real income. Graphically, as long as the prices remain constant, changing income will create a parallel shift of the budget constraint. Increasing income will shift the budget constraint right since more of both goods can be bought by the consumer. On the other hand, a decrease in income will shift the budget constraint to the left.

Depending on the indifference curves, as income increases, the quantity purchased of a good can either increase, decrease or stay the same. In the figure below, good Y is a normal good since the amount purchased increased as the budget constraint shifted from BC1 to the higher income budget constraint, BC2. However, good X is an inferior good since the quantity purchased by the consumer decreased as their income increased.

${\displaystyle \mathrm{\Delta }{y}_1^n}$ is the change in the demand for good 1 when we change income from ${\displaystyle m^{\prime }}$ to ${\displaystyle m}$, holding the price of good 1 fixed at ${\displaystyle p_1^{\prime }}$:

${\displaystyle \mathrm{\Delta }{y}_1^n=y_1(p_1^{\prime },m)-y_1(p_1^{\prime },m^{\prime }).}$

The equilibrium points at various levels of consumer's income builds the income consumption curve. This curve traces out the income consumption curve traces out the income effect on the quantity consumed of the goods.

Price effect as the sum of substitution and income effects

Further information: Slutsky equation and Hicksian demand

Every price change can be decomposed into an income effect and a substitution effect; the price effect is the sum of substitution and income effects.

The substitution effect is the change in demands resulting from a price change that alters the slope of the budget constraint but leaves the consumer on the same indifference curve. In other words, it illustrates the consumer's new consumption basket after the price change while being compensated as to allow the consumer to be as satisfied as he or she was previously. By this effect, the consumer is posited to substitute toward the good that becomes comparatively less expensive. In the illustration below this corresponds to an imaginary budget constraint denoted SC being tangent to the indifference curve I1. Then the income effect from the rise in purchasing power from a price fall reinforces the substitution effect. If the good is an inferior good, then the income effect will offset in some degree the substitution effect. If the income effect for an inferior good is sufficiently strong, the consumer will buy less of the good when it becomes less expensive. This is also known as a Giffen good (commonly believed to be a rarity).

The substitution effect, ${\displaystyle \mathrm{\Delta }{y}_1^s}$, is the change in the amount demanded for ${\displaystyle Y}$ when the price of good ${\displaystyle Y}$ falls from ${\displaystyle p_1}$ to ${\displaystyle p_1^{\prime }}$ (represented by the budget constraint shifting from ${\displaystyle BC1}$ to ${\displaystyle BC2}$ and thus increasing purchasing power) and, at the same time, the money income falls from ${\displaystyle m}$ to ${\displaystyle m^{\prime }}$ to keep the consumer at the same level of utility on I1:

${\displaystyle \mathrm{\Delta }{y}_1^s=y_1(p_1^{\prime },m^{\prime })-y_1(p_1,m)=Y_s-Y_1.}$

The substitution effect increases the amount demanded of good ${\displaystyle Y}$ from ${\displaystyle Y_1}$ to ${\displaystyle Y_s}$ in the diagram. In the example shown, the income effect of the fall in ${\displaystyle p_1}$ partly offsets the substitution effect as the amount demanded of ${\displaystyle Y}$ in the absence of an offsetting income change ends up at ${\displaystyle Y_2}$ thus the income effect from the rise in purchasing power due to the price drop is that the quantity demanded of ${\displaystyle Y}$ goes from ${\displaystyle Y_s}$ to ${\displaystyle Y_2}$. The total effect of the price drop of good Y on the quantity demanded is the sum of the substitution effect and the income effect.

Indifference curves for goods that are perfect substitutes or complements

Goods X and Y are perfect substitutes.

Perfect substitutes

A perfect substitute is a good or service which can be used in exactly the same way as the good or service it replaces. Products which are perfect substitutes for one another will exhibit straight lines on the indifference curve (as shown in the figure to the right). This demonstrates that the relative utility of one good is equivalent to the relative utility of the other, regardless of their quantity. An example of perfect substitutes could be Coca-Cola compared to Pepsi Max. A consumer who considers these products as perfect substitutes will be indifferent to spending all of their budget on strictly one or the other.

Left and Right Shoes are perfect complements.

Perfect complements

A perfect complement is a good or service whose appeal increases with the popularity of its complement. The relationship between both goods X and Y are naturally dependent on each other along with the concept of consumption being dependent upon other consumption. Products that are perfect complements will be demonstrated graphically on an indifference curve with two lines at perfect right angles to one another (as shown in the figure to the right). This demonstrates that the demand and consumption of one good is inherently tied to the other. In other words, when the consumption of one good increases, as does the consumption of the complementary good. An example of complementary goods is shown in the figure to the right. Left shoes and right shoes can be considered perfect complements as the ratio between sales of left and right shoes will never shift noticeably from 1:1.

Utility

The usefulness of a good is a key factor when discussing consumer decision making. When a product both meets the needs of a consumer and has value it has utility. Utility can be quantified through a set of numerical values that reflect the relative rankings of various bundles of goods measured by consumers preference in their consumption.

Utility function measures the preferences consumers apply to their consumption of goods and services. One of the most well known utility functions is the Cobb–Douglas utility function.

Marginal utility

Marginal utility differs from utility as it refers to the additional benefit derived from consuming one more unit of a specific good or service. Marginal utility result can be positive, neutral or negative depending on the outcomes for the consumer. Utility is not constant, and for every additional unit consumed, often the consumer experiences what economists refer to as the diminishing marginal utility or diminishing returns, where each additional unit adds less and less marginal utility.

It can be represented by the formula below:

MU_Z = △U/△Z

where MU_Z represents the marginal utility of good Z; △U and △Z represent changes in utility and consumption of good Z respectively.

Assumptions

The behavioral assumption of the consumer theory proposed herein is that all consumers seek to maximize utility. Traditionally in economics, this activity of maximizing utility has been deemed as the "rational" behavior of decision makers. More specifically, in the eyes of economists, all consumers seek to maximize their utility function subject to a budgetary constraint. In other words, economists assume that consumers will always choose the "best" bundle of goods they can afford. Consumer theory is therefore based on generating refutable hypotheses about the nature of consumer demand from this behavioral postulate.

In order to reason from the central postulate towards a useful model of consumer choice, it is necessary to make additional assumptions about the certain preferences that consumers employ when selecting their preferred "bundle" of goods. These are relatively strict, allowing for the model to generate more useful hypotheses with regard to consumer behavior than weaker assumptions, which would allow any empirical data to be explained in terms of stupidity, ignorance, or some other factor, and hence would not be able to generate any predictions about future demand at all. For the most part, however, they represent statements which would only be contradicted if a consumer was acting in (what was widely regarded as) a strange manner. In this vein, the modern form of consumer choice theory assumes:

Consumer choice theory is based on the assumption that the consumer fully understands their own preferences, allowing for a simple but accurate comparison between any two bundles of good presented.^[23] That is to say, it is assumed that if a consumer is presented with two consumption bundles A and B each containing different combinations of n goods, the consumer can unambiguously decide if (s)he prefers A to B, B to A, or is indifferent to both. The few scenarios where it is possible to imagine that decision-making would be very difficult are thus placed "outside the domain of economic analysis". However, discoveries in behavioral economics has found that actual decision making is affected by various factors, such as whether choices are presented together or separately through the distinction bias.

Preferences are complete

When a consumer is faced with a choice between two goods A and B, they must rank them so that only one of the followings is true: the consumer prefers the good A to good B, the consumer prefers good B to good A, or the consumer is indifferent between the goods.

Either A ≥ B or B ≥ A (or both) for all (A,B).

Preference are transitive

This assumption dictates that if good A is preferred to good B and good B is preferred to good C then good A must be preferred to good C. This also means that if the consumer is indifferent between goods A and B and is indifferent between goods B and C she will be indifferent between goods A and C. This is the consistency assumption. This assumption eliminates the possibility of intersecting indifference curves.

If A ≥ B and B ≥ C, then A ≥ B (for all A, B, C).

Preferences are reflexive

Relationships are reflexive if they can be applied when both sides of the relationship are the same. Weak preference relationships are reflexive. A bundle of goods can be said to be weakly preferred to itself, but not strictly preferred to itself. As such, a consumer would say that they consider good A to be at least as good as good B. Alternatively, the axiom can be modified to read that the consumer is indifferent with regard to A and B.

Preferences exhibit non-satiation

The assumption of non-satiated preferences means that more is better – all else being the same, more of a commodity is better than less of it. This is the "more is always better" assumption; that in general if a consumer is offered two almost identical bundles A and B, but where B includes more of one particular good, the consumer will choose bundle B. In other words, this theory assumes that a consumer will never be completely satisfied, as they will always be happier consuming a little bit more. Among other things this assumption precludes circular indifference curves. Non-satiation in this sense is not a necessary but a convenient assumption. It avoids unnecessary complications in the mathematical models.

Indifference curves exhibit diminishing marginal rates of substitution

This assumption assures that indifference curves are smooth and convex to the origin and is implicit in the last assumption.

This assumption also set the stage for using techniques of constrained optimization. This is because the shape of the indifference curve assures that the first derivative is negative and the second is positive.

This assumption incorporates the theory of diminishing marginal utility. This theory of diminishing marginal utility states that the added satisfaction experienced by a consumer from having one additional unit of a good or service will diminish. In other words, the marginal utility of each additional unit will decline. An example of this can be illustrated by a consumer who orders several coffees throughout the course of a day. The marginal utility experienced by the first coffee will be greater than the second. The marginal utility experienced by the second coffee will be greater than the third, and so on.

Goods are available in all quantities

It is assumed that a consumer may choose to purchase any quantity of a goods they desire, for example, 2.6 eggs and 4.23 loaves of bread. Whilst this makes the model less precise, it is generally acknowledged to provide a useful simplification to the calculations involved in consumer choice theory, especially since consumer demand is often examined over a considerable period of time.

Note the assumptions do not guarantee that the demand curve will be negatively sloped. A positively sloped curve is not inconsistent with the assumptions.

Use value

In Marx's critique of the political economy, any labor-product has a value and a use value, and if it is traded as a commodity in markets, it additionally has an exchange value, most often expressed as a money-price. Marx acknowledges that commodities being traded also have a general utility, implied by the fact that people want them, but he argues that this by itself tells us nothing about the specific character of the economy in which they are produced and sold.

Labor-leisure trade-off

Main article: Backward bending supply curve of labour

Consumer theory is also relevant when considering the trade-off between labour and leisure, allowing us to examine the choices made based on consumers preferences and constraints. In this analysis, labour and leisure are both considered goods. Since a consumer has a finite amount of time, they must make a choice between leisure (which earns no income for consumption) and labor (which does earn income for consumption). Using this method the opportunity cost of their decisions can dictate consumers actions.

The previous model of consumer choice theory is applicable with only slight modifications. Primarily, the total amount of time that an individual has to allocate is known as their "time endowment", and is often denoted as T. Next, the amount an individual allocates to labor (L) and leisure (ℓ) is constrained by T such that:

${\displaystyle \ell +L=T}$

Consumption (C), which represents the amount of goods or services a person can take, is determined as the amount of labor they choose multiplied by the amount they are paid per hour of labor (their wage, often denoted w). Thus, the amount that a person consumes is:

${\displaystyle C=w(T-\ell )}$

Such that, when a consumer chooses no leisure ${\displaystyle (\ell =0)}$ then ${\displaystyle T-\ell =T}$ and ${\displaystyle C=wT}$.

From this labor-leisure tradeoff model, both the substitution effect and the income effect can be used to analyse various changes caused by welfare benefits, labor taxation, or tax credits.

It is important to note that the labour-leisure tradeoff will also be impacted on consumers norms, preferences and other non-economical factors. Therefore, real world applications of this relationship should be supported by an understanding of the factors previously listed to ensure oversights for consumer behaviour are avoided.

Publish or perish

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Publish_or_perish

"Publish or perish" is an aphorism describing the pressure to publish academic work in order to succeed in an academic career. Such institutional pressure is generally strongest at research universities. Some researchers have identified the publish or perish environment as a contributing factor to the replication crisis.

Successful publications bring attention to scholars and their sponsoring institutions, which can help continued funding and their careers. In popular academic perception, scholars who publish infrequently, or who focus on activities that do not result in publications, such as instructing undergraduates, may lose ground in competition for available tenure-track positions. The pressure to publish has been cited as a cause of poor work being submitted to academic journals. The value of published work is often determined by the prestige of the academic journal it is published in. Journals can be measured by their impact factor (IF), which is the average number of citations to articles published in a particular journal over the last two years.

Academic opinion

The pressure to publish has been strongly criticized on the basis that over-emphasis on publishing may decrease the value of resulting scholarship, as scholars must spend more time scrambling to publish whatever they can get into print, rather than spending time developing significant research agendas. Similarly, humanities scholar Camille Paglia has described the publish or perish paradigm as "tyranny" and further writes that "The [academic] profession has become obsessed with quantity rather than quality. ... One brilliant article should outweigh one mediocre book."

The pressure to publish or perish also detracts from the time and effort professors can devote to teaching undergraduate courses and mentoring graduate students. The rewards for exceptional teaching rarely match the rewards for exceptional research, which encourages faculty to favor the latter whenever they conflict.

Also, publish-or-perish is linked to scientific misconduct or at least questionable ethics. It has also been argued that the quality of scientific work has suffered due to publication pressures. Physicist Peter Higgs, namesake of the Higgs boson, was quoted in 2013 as saying that academic expectations since the 1990s would likely have prevented him from both making his groundbreaking research contributions and attaining tenure: "It's difficult to imagine how I would ever have enough peace and quiet in the present sort of climate to do what I did in 1964 ... Today I wouldn't get an academic job. It's as simple as that. I don't think I would be regarded as productive enough."

According to some researchers, the publish or perish culture might also perpetuate bias in academic institutions. Overall, women publish less frequently than men, and when they do publish their work receives fewer citations than their male counterparts, even when it is published in journals with significantly higher impact factors. Furthermore, one study pointed out that gaps in the promotion and progress of women in academic medicine may be significantly influenced by gender-based variances in article citations.

Research-oriented universities may attempt to manage the unhealthy aspects of the publish or perish practices, but their administrators often argue that some pressure to produce cutting-edge research is necessary to motivate scholars early in their careers to focus on research advancement, and learn to balance its achievement with the other responsibilities of the professorial role. The call to abolish tenure is very much a minority opinion in such settings.

Variants

The MIT Media Lab's director Nicholas Negroponte instituted the motto "demo or die", privileging demonstrations over publication. Another director, Joi Ito, modified this to "deploy or die", emphasizing the adoption of the technology.

In popular culture

In 2024, card game "Publish or Perish" attracted more that 280,000 dollars founding at Kickstarter. In this game players are aimed to publish articles of moderate quality to get more citations.

More Information

The earliest known use of the term in an academic context was in a 1928 journal article. The phrase appeared in a non-academic context in the 1932 book, Archibald Cary Coolidge: Life and Letters, by Harold Jefferson Coolidge. In 1938, the phrase appeared in a college-related publication. According to Eugene Garfield, the expression first appeared in an academic context in Logan Wilson's book, "The Academic Man: A Study in the Sociology of a Profession", published in 1942. Others have attributed the phrase to Columbia University geneticist Kimball C. Atwood III.

Dunning–Kruger effect

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect

Relation between average self-perceived performance and average actual performance on a college exam. The red area shows the tendency of low performers to overestimate their abilities. Nevertheless, low performers' self-assessment is lower than that of high performers.

The Dunning–Kruger effect is a cognitive bias that describes the systematic tendency of people with low ability in a specific area to give overly positive assessments of this ability. The term may also describe the tendency of high performers to underestimate their skills. It was first described by the psychologists David Dunning and Justin Kruger in 1999. In popular culture, the Dunning–Kruger effect is sometimes misunderstood as claiming that people with low intelligence are generally overconfident, instead of describing the specific overconfidence of people unskilled at particular areas.

The Dunning–Kruger effect has been demonstrated across multiple studies in a wide range of tasks from fields such as business, politics, medicine, driving, aviation, spatial memory, examinations in school, and literacy. The original study by Dunning and Kruger focused on logical reasoning, grammar, and social skills. The effect is usually measured by comparing self-assessment with objective performance. For example, participants may take a quiz and estimate their performance afterward, and their estimates are then compared to their actual results.

A number of explanations for, and criticisms of, the Dunning–Kruger effect have been proposed. The metacognitive explanation holds that poor performers misjudge their abilities because they lack the ability to recognize the qualitative difference between their performances and the performances of others. The statistical explanation holds that the empirical effect may largely be the result of a mere statistical effect and the fact that people have a general tendency to think that one is better than average. The rational explanation holds that overly positive prior beliefs about one's skills are the source of false self-assessment. Another explanation claims that self-assessment is more difficult and error-prone for low performers because many of them have very similar skill levels.

There is also disagreement about where the effect applies and about how strong it is, as well as about the practical consequences of the effect. Inaccurate self-assessment could potentially lead people to making bad decisions, such as choosing a career for which they are unfit, engaging in dangerous behavior, and inhibiting people from addressing their shortcomings to improve themselves.

Definition

The Dunning–Kruger effect is the tendency of people with low ability in a specific area to give overly positive assessments of this ability. This is often seen as a cognitive bias, that is, a systematic tendency to engage in erroneous forms of thinking and judging. In the case of the Dunning–Kruger effect, the systematic error concerns people with low skill in a specific area trying to evaluate their competence within this area and their tendency to greatly overestimate their competence.

The Dunning–Kruger effect is usually defined specifically for the self-assessments of people with a low level of competence. But some theorists do not only restrict it to the bias of people with low skill but also use it to describe the reverse effect, the tendency of highly skilled people to underestimate their abilities relative to the abilities of others. In this case, the source of the error may not be the self-assessment of one's skills, but an overly positive assessment of the skills of others. This phenomenon can be understood as a form of the false-consensus effect, the tendency to "overestimate the extent to which other people share one's beliefs, attitudes, and behaviours".

Not knowing the scope of your own ignorance is part of the human condition. The problem with it is we see it in other people, and we don't see it in ourselves. The first rule of the Dunning–Kruger club is you don't know you're a member of the Dunning–Kruger club.

David Dunning

Some researchers include a metacognitive component in their definition. In this view, the Dunning–Kruger effect is the thesis that those who are incompetent in a given area tend to be ignorant of their incompetence; they lack the metacognitive ability to become aware of their incompetence. As incompetence often includes being unable to tell the difference between competence and incompetence, it is difficult for the incompetent to recognize their incompetence. This is sometimes termed the "dual-burden" account, since low performers are affected by two burdens: they lack a skill and they are unaware of this deficiency. Other definitions focus on the tendency to overestimate one's ability and see the relation to metacognition as a possible explanation that is not part of the definition. This contrast is relevant since the metacognitive explanation is controversial. Many criticisms of the Dunning–Kruger effect target this explanation but accept the empirical findings that low performers tend to overestimate their skills.

Among laypeople, the Dunning–Kruger effect is often misunderstood as the claim that people with low intelligence are more confident in their knowledge and skills than people with high intelligence. According to psychologist Robert D. McIntosh and his colleagues, it is sometimes understood in popular culture as the claim that "stupid people are too stupid to know they are stupid". But the Dunning–Kruger effect applies not to intelligence in general but to skills in specific tasks. Nor does it claim that people lacking a given skill are as confident as high performers. Rather, low performers overestimate themselves but their confidence level is still below that of high performers.

Measurement, analysis, and investigated tasks

Performance at an exam with 45 questions, measured first in relation to the peer group (top) and then in relation to the number of questions answered correctly (bottom). The diagram shows the average performance of the groups corresponding to each quartile.

The most common approach to measuring the Dunning–Kruger effect is to compare self-assessment with objective performance. The self-assessment is sometimes called subjective ability in contrast to the objective ability corresponding to the actual performance. The self-assessment may be done before or after the performance. If done afterward, the participants receive no independent clues during the performance as to how well they did. Thus, if the activity involves answering quiz questions, no feedback is given as to whether a given answer was correct.

The measurement of the subjective and the objective abilities can be in absolute or relative terms. When done in absolute terms, self-assessment and performance are measured according to objective standards, e.g. concerning how many quiz questions were answered correctly. When done in relative terms, the results are compared with a peer group. In this case, participants are asked to assess their performances in relation to the other participants, for example in the form of estimating the percentage of peers they outperformed. The Dunning–Kruger effect is present in both cases, but tends to be significantly more pronounced when done in relative terms; people are usually less accurate when assessing how well they did relative to their peer group than when simply predicting their raw score.

The main point of interest for researchers is usually the correlation between subjective and objective ability. To provide a simplified form of analysis of the measurements, objective performances are often divided into four groups. They start from the bottom quartile of low performers and proceed to the top quartile of high performers. The strongest effect is seen for the participants in the bottom quartile, who tend to see themselves as being part of the top two quartiles when measured in relative terms.

The initial study by David Dunning and Justin Kruger examined the performance and self-assessment of undergraduate students in inductive, deductive, and abductive logical reasoning; English grammar; and appreciation of humor. Across four studies, the research indicates that the participants who scored in the bottom quartile overestimated their test performance and their abilities. Their test scores placed them in the 12th percentile, but they ranked themselves in the 62nd percentile. Other studies focus on how a person's self-view causes inaccurate self-assessments. Some studies indicate that the extent of the inaccuracy depends on the type of task and can be improved by becoming a better performer.

Overall, the Dunning–Kruger effect has been studied across a wide range of tasks, in aviation, business, debating, chess, driving, literacy, medicine, politics, spatial memory, and other fields. Many studies focus on students—for example, how they assess their performance after an exam. In some cases, these studies gather and compare data from different countries. Studies are often done in laboratories; the effect has also been examined in other settings, including assessments of hunters' knowledge of firearms and large Internet surveys.

Explanations

Various theorists have tried to provide models to explain the Dunning–Kruger effect's underlying causes. The original explanation by Dunning and Kruger holds that a lack of metacognitive abilities is responsible. This interpretation is not universally accepted, and many alternative explanations have been proposed. Some of them focus only on one specific factor, while others see a combination of various factors as the cause.

Metacognitive

The metacognitive explanation rests on the idea that part of acquiring a skill consists in learning to distinguish between good and bad performances of the skill. It assumes that people of low skill level are unable to properly assess their performance because they have not yet acquired the discriminatory ability to do so. This leads them to believe that they are better than they actually are because they do not see the qualitative difference between their performance and that of others. In this regard, they lack the metacognitive ability to recognize their incompetence. This model has also been called the "dual-burden account" or the "double-burden of incompetence", since the burden of regular incompetence is paired with the burden of metacognitive incompetence. The metacognitive lack may hinder some people from becoming better by hiding their flaws from them. This can then be used to explain how self-confidence is sometimes higher for unskilled people than for people with an average skill: only the latter are aware of their flaws.

Some attempts have been made to measure metacognitive abilities directly to examine this hypothesis. Some findings suggest that poor performers have reduced metacognitive sensitivity, but it is not clear that its extent is sufficient to explain the Dunning–Kruger effect. Another study concluded that unskilled people lack information but that their metacognitive processes have the same quality as those of skilled people. An indirect argument for the metacognitive model is based on the observation that training people in logical reasoning helps them make more accurate self-assessments. Many criticisms of the metacognitive model hold that it has insufficient empirical evidence and that alternative models offer a better explanation.

Statistical and better-than-average effect

Simulated data of the relation between subjective (self-assessed) and objective IQ. The upper diagram shows the individual data points and the lower one shows the averages of the different IQ groups. This simulation is based only on the statistical effect known as the regression toward the mean together with the better-than-average effect. Proponents of the statistical explanation use it to support their claim that these two factors are sufficient to explain the Dunning–Kruger effect.

A different interpretation is further removed from the psychological level and sees the Dunning–Kruger effect as mainly a statistical artifact. It is based on the idea that the statistical effect known as regression toward the mean explains the empirical findings. This effect happens when two variables are not perfectly correlated: if one picks a sample that has an extreme value for one variable, it tends to show a less extreme value for the other variable. For the Dunning–Kruger effect, the two variables are actual performance and self-assessed performance. If a person with low actual performance is selected, their self-assessed performance tends to be higher.

Most researchers acknowledge that regression toward the mean is a relevant statistical effect that must be taken into account when interpreting the empirical findings. This can be achieved by various methods. Some theorists, like Gilles Gignac and Marcin Zajenkowski, go further and argue that regression toward the mean in combination with other cognitive biases, like the better-than-average effect, can explain most of the empirical findings. This type of explanation is sometimes called "noise plus bias".

According to the better-than-average effect, people generally tend to rate their abilities, attributes, and personality traits as better than average. For example, the average IQ is 100, but people on average think their IQ is 115. The better-than-average effect differs from the Dunning–Kruger effect since it does not track how the overly positive outlook relates to skill. The Dunning–Kruger effect, on the other hand, focuses on how this type of misjudgment happens for poor performers. When the better-than-average effect is paired with regression toward the mean, it shows a similar tendency. This way, it can explain both that unskilled people greatly overestimate their competence and that the reverse effect for highly skilled people is much less pronounced. This can be shown using simulated experiments that have almost the same correlation between objective and self-assessed ability as actual experiments.

Some critics of this model have argued that it can explain the Dunning–Kruger effect only when assessing one's ability relative to one's peer group. But it may not be able to explain self-assessment relative to an objective standard. A further objection claims that seeing the Dunning–Kruger effect as a regression toward the mean is only a form of relabeling the problem and does not explain what mechanism causes the regression.

Based on statistical considerations, Nuhfer et al. arrive at the conclusion that there is no strong tendency to overly positive self-assessment and that the label "unskilled and unaware of it" applies only to few people. Science communicator Jonathan Jarry makes the case that this effect is the only one shown in the original and subsequent papers. Dunning has defended his findings, writing that purely statistical explanations often fail to consider key scholarly findings while adding that self-misjudgements are real regardless of their underlying cause.

Rational

The rational model of the Dunning–Kruger effect explains the observed regression toward the mean not as a statistical artifact but as the result of prior beliefs. If low performers expect to perform well, this can cause them to give an overly positive self-assessment. This model uses a psychological interpretation that differs from the metacognitive explanation. It holds that the error is caused by overly positive prior beliefs and not by the inability to correctly assess oneself. For example, after answering a ten-question quiz, a low performer with only four correct answers may believe they got two questions right and five questions wrong, while they are unsure about the remaining three. Because of their positive prior beliefs, they will automatically assume that they got these three remaining questions right and thereby overestimate their performance.

Distribution of high and low performers

Another model sees the way high and low performers are distributed as the source of erroneous self-assessment. It is based on the assumption that many low performers' skill levels are very similar, i.e., that "many people [are] piled up at the bottom rungs of skill level". This would make it much more difficult for them to accurately assess their skills in relation to their peers. According to this model, the reason for the increased tendency to give false self-assessments is not a lack of metacognitive ability but a more challenging situation in which this ability is applied. One criticism of this interpretation is directed against the assumption that this type of distribution of skill levels can always be used as an explanation. While it can be found in various fields where the Dunning–Kruger effect has been researched, it is not present in all of them. Another criticism holds that this model can explain the Dunning–Kruger effect only when the self-assessment is measured relative to one's peer group, but that it may fail when it is measured relative to absolute standards.

Lack of incentive

A further explanation, sometimes given by theorists with an economic background, focuses on the fact that participants in the corresponding studies lack incentive to give accurate self-assessments. In such cases, intellectual laziness or a desire to look good to the experimenter may motivate participants to give overly positive self-assessments. For this reason, some studies were conducted with additional incentives to be accurate. One study gave participants a monetary reward based on how accurate their self-assessments were. These studies failed to show any significant increase in accuracy for the incentive group in contrast to the control group.  

Practical significance

There are disagreements about the Dunning–Kruger effect's magnitude and practical consequences as compared to other psychological effects. Claims about its significance often focus on how it causes affected people to make decisions that have bad outcomes for them or others. For example, according to Gilles E. Gignac and Marcin Zajenkowski, it can have long-term consequences by leading poor performers into careers for which they are unfit. High performers underestimating their skills, though, may forgo viable career opportunities matching their skills in favor of less promising ones that are below their skill level. In other cases, the wrong decisions can also have short-term effects. For example, Pavel et al. hold that overconfidence can lead pilots to operate a new aircraft for which they lack adequate training or to engage in flight maneuvers that exceed their proficiency.

Emergency medicine is another area where the correct assessment of one's skills and the risks of treatment matters. According to Lisa TenEyck, the tendencies of physicians in training to be overconfident must be considered to ensure the appropriate degree of supervision and feedback. Schlösser et al. hold that the Dunning–Kruger effect can also negatively affect economic activities. This is the case, for example, when the price of a good, such as a used car, is lowered by the buyers' uncertainty about its quality. An overconfident buyer unaware of their lack of knowledge may be willing to pay a much higher price because they do not take into account all the potential flaws and risks relevant to the price.

Another implication concerns fields in which researchers rely on people's self-assessments to evaluate their skills. This is common, for example, in vocational counseling or to estimate students' and professionals' information literacy skills. According to Khalid Mahmood, the Dunning–Kruger effect indicates that such self-assessments often do not correspond to the underlying skills. It implies that they are unreliable as a method for gathering this type of data. Regardless of the field in question, the metacognitive ignorance often linked to the Dunning–Kruger effect may inhibit low performers from improving themselves. Since they are unaware of many of their flaws, they may have little motivation to address and overcome them.

Not all accounts of the Dunning–Kruger effect focus on its negative sides. Some also concentrate on its positive sides, e.g. that ignorance is sometimes bliss. In this sense, optimism can lead people to experience their situation more positively, and overconfidence may help them achieve even unrealistic goals. To distinguish the negative from the positive sides, two important phases have been suggested to be relevant for realizing a goal: preparatory planning and the execution of the plan. According to Dunning, overconfidence may be beneficial in the execution phase by increasing motivation and energy. However it can be detrimental in the planning phase since the agent may ignore bad odds, take unnecessary risks, or fail to prepare for contingencies. For example, being overconfident may be advantageous for a general on the day of battle because of the additional inspiration passed on to his troops. But it can be disadvantageous in the weeks before by ignoring the need for reserve troops or additional protective gear.

Historical precursors of the Dunning–Kruger effect were expressed by theorists such as Charles Darwin ("Ignorance more frequently begets confidence than does knowledge") and Bertrand Russell ("...in the modern world the stupid are cocksure while the intelligent are full of doubt"). In 2000, Kruger and Dunning were awarded the satirical Ig Nobel Prize in recognition of the scientific work recorded in "their modest report".