by Robert Middlekauff
The Economics department has been searching for two new professors for the past year. After conducting interviews last semester, candidates have been arriving in Sewanee over the past week to speak in front of a class, meet with students, and hold a presentation of some of their research.
The department is making one replacement, but it is also expanding to meet the growing demand for economics courses. According to head of the Economics department, Dr. Doug Williams, the University granted an expansion for Economics because of “growth in the student body and a high number of students per class.” They are hiring a Finance Professor and a Behavioral Economics Professor. Finance concerns more business, banking, and macroeconomic related topics, while Behavioral Economics seeks to apply economic thinking to psychology and to do so mathematically. Williams indicated that “a behavioral economist will be able to bring inter-disciplinary courses to Sewanee. It is perfect for a liberal arts college where we introduce students to different ways of knowing and looking at the world.” The field first gained worldwide attention when Daniel Kahneman, a psychologist, won the Nobel Prize for Economic Sciences in 2002. The new professor will be Sewanee’s first behavioral economist.
The first behavioral economist candidate, Xiaofei Pan, gave her presentation on Thursday January 16. A graduate of George Mason University and currently a post-doctoral fellow at Harvard University, she presented her current research on gift-giving and the motivations behind reciprocity. She designed an experiment in a laboratory in which people handle real money, but she manipulated the situation so that she could analyze the intentions of the gift-giving.
The basic question is whether good intentions or actual gifts matter more to a person who receives a gift. Pan used the hypothetical situation whereby two friends send a gift to another friend, but one gift gets lost in the mail. With limited resources to reciprocate, a central question is, will the third person favor the person whose gift actually arrived or treat both equally because they both had the same intentions? She finds that intentions do not matter and the third person cares much more about whether the gift actually arrives rather than if there are good intentions behind it.
Real world applications of this research concern corruption. Current U.S. law stipulates that bad intentions have to be proven in order for a corruption charge to hold in court, but Pan argues that intentions of the gift giver do not matter. Instead, the fact that the gift was given is most important and will lead to some form of reciprocity.
The second behavioral candidate, Husnain Fateh Ahmad, is a PhD candidate from the University of Iowa. His talk, entitled “Reference Points in Auctions,” concerned the motivations behind bidding in an auction. He analyzed a second price auction whereby the highest bidder has to pay the price of the second highest bidder. His intention is to test the Standard Utility Theory taught in Microeconomics and to offer an alternative theory. Standard Utility Theory stipulates that a person will gain or lose utility based solely on how they value the good in question and how much they pay. If they pay less than how much they value it for, then they gain utility. People will therefore bid according to how they value the good in order to maximize utility.
Ahmad argues that there is another variable that determines utility in auctions. He claims that people also have an expectation of how much a good or service will cost that is separate from how an individual values the good. If bidders, or consumers in general, pay less than the expected value, they will experience a gain in utility, and see a corresponding loss if they pay more than the expected value. This applies to bidding as well: bidders bid closer to their expectations rather than how they personally value a good.
This alternative theory is based on the assumption that utility is derived not only from how people value goods, but also from this expectation, or reference point. One of his examples to clarify this was that if you expect a movie to be bad, but it is not, then there is a gain in utility even if your own valuation of the movie is average. According to Ahmad, the central theme is this: “lowered expectations are awesome. You will always be happy.”
The last behavioral candidate will give their talk on January 31. The economics department will be hosting one more finance candidate as well, after which they will make the final hiring decisions in the coming weeks.