POS week 5

microeconomics research

examines preferences and choices of individuals

macroeconomics research

trends at much higher level of aggregation

methodological individualism

individuals determine the way society is

ontological individualism

in reality no supra-individual entities exist, only aggregate outcomes of the actions and behaviours of individuals

Character of the analysis

1. Explaining phenomena - perspective of spectator; 2. Understanding phenomena - perspective of participant

Hermeneutics

art of interpretation; understanding meanings; the goal of science is not only to predict but to understand people's behaviour, hence we should assume the perspective of the participant and try to interpret their aims and find their reasons

Rational Choice Theory

method through which we can try to understand social institutions and social changes as resulting from there actions and interactions of rational individuals

rational individuals

individuals who try to optimise their own preferences to the fullest

Considerations of Rational Choice Theory

society to be a cooperation of individuals who tune their behaviour, cuz it is the best way for them to fulfil their goals; RCT assumes that all individuals act as perfectly rational beings

perfectly rational beings

people's preferences are ordered according to priority; individuals do have all information about all options and results; they are capable of calculating the best mix of results

strategic rationality

you anticipate others' choices as best as you can

problem of coordination in a coordination game

such model always involves at least two individuals and two options, the results can be seen as levels of utility or priorities in succession. 1 represents the highest, 4 the lowest. When an equilibrium is possible, all players will get to it

Nash equilibrium

combination of choices of which no choice can be changed to the benefit of any of the players

Pareto optimal results

combination of choices in which none of the players can benefit from changing their choice without harming at leats one of the other players

Prisoner's Dilemma

it showcases why we need not only conventions, but also a government that can impose sanctions for not keeping to conventions

Claims of Rational Choice Theory

it assumes that individuals will strive to have their preferences satisfied, but those don't need to be egoistic; the problem with RCT is that it can only make claims about the behaviour of agents, but at the same time it draws conclusions about actors

behaviourist conception of preference

subject choose what they prefer, so their choice reveal their preferences

mentalist conception of preference

subjects prefer what they find most agreeable and what gives them most pleasure

meta-theory

theory about theory; assumptions, ambitions, models of explanation, epistemologies methodological prescriptions; theories sharing similar assumptions

types of meta-theoretical questions

ontological - individualism or holism?; is social reality socially constructed?; epistemological - what type of explanation should we look for? explaining vs understanding

Explanations and their aims

Causal and functional - explaining; Intentional - understanding

Rational Choice Paradigm

individual, explaining; explain behaviour and social level outcomes from the rational choices of individual agents

Assumptions of Rational Choice Paradigm

1. Methodological Individualism; 2. Agents are fully self-interested; 3. Agents are perfectly rational

Methodological Individualism - 1st Assumption of RC Paradigm

social phenomena (rules, institutions) really exist, but we can explain them only form the actions and behaviours of individuals; i.e. institutions - meeting the needs of society by filling certain roles&behaviours

Self-interest - 2nd Assumption of RC Paradigm

agents exclusively seek to maximise their own welfare; welfare of others is only relevant insofar it figures in one's own preference ordering

Rationality - 3rd Assumption of RC Paradigm

rational agents have a complete and consistent preference ordering, all options included in preference ordering; rational agents have all relevant info and perfectly functioning computer on board (in our minds)

Endowment effect

we tend to value things higher than their market value when they belong to us

IKEA effect

if we invest labor in something, we value it higher

Two forms of rationality

1. Parametric rationality - assumes the choices of others to be known in advance; 2. Strategic rationality - takes into consideration the rational choices of other agents, who try to anticipate your actions

Game Theory

process of modelling strategic interaction between two or more players in the situation containing certain rules and outcomes

Game theory - concepts

explains patterns of behaviour and institutions from interdependent rational choices; strategic rationality; Nash-equilibrium; Pareto-optimal; coordination problem - how can I make people cooperate?; motivational problem - how can I make people work hard?

Agency theory

parametric rationality, helps to resolve issues in relationships between human interactions

Agency relationships lead to agency problems because:

conflicts of interest between agent and principal; info/knowledge asymmetry; ex ante (selecting the right employee) - adverse selection; ex post (monitoring employee once hired) - moral hazard

How you solve agency problems?

monitoring costs (principal); bonding costs (agent); residual loss (principal)