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Neuroscience, psychology and economics: the evidence for System 3 (long)

In my last post I outlined the concept of System 3, what it is and why it matters. In short, System 3 is the mental ability to imagine the future and evaluate how happy you will be in it – based on how pleasurable the process of imagining itself is.

A lot of different research strands have come together to result in the identification of System 3 as a distinct mental process. I summarise the key steps here:
The fundamental building block of System 3 is the stimulus-response relationship. It has been known for a long time that people easily learn stimulus-response relationships when they are rewarded for the response. The classic examples come from Pavlov (who rewarded dogs with food and discovered that they would start to get excited when they saw the experimenter’s white coat – as any pet owner will recognise), and Skinner (who trained pigeons to learn that pressing a lever was associated with getting fed). Although these original experiments were done on animals, there is plenty of …

Introducing System 3: How we use our imagination to make choices

In recent years we’ve become used to thinking about decisions as “system 1” or “system 2”. System 1 choices are automatic decisions, made without thinking, based on an immediate emotional or sensory reaction. System 2 is used to stop and rationally calculate the consequences of our choices, and determine the best cost-benefit tradeoff.

But these two processes don’t capture every decision. Indeed they might only encompass a minority of our daily choices.

Recent work in neuroscience and psychology has discovered another way of making choices: with the imagination. Customers imagine their possible futures: the outcomes they would experience after a choice, and how those outcomes will make them feel. The future that makes them feel happiest will be the one they choose. These choices use different parts of the brain than System 1 and 2. They are called System 3 choices.

Think about how you might buy a car. System 1 would suggest that you see a colour, or shape, or brand of car, immed…

Book review: The Choice Factory by Richard Shotton

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There are few truly universal books on behavioural science: like most of the others, this one has a particular reader in mind. Richard's reader works in advertising, and it must be a rare advertising executive who still hasn't heard of behavioural economics. Richard therefore heads straight into the meat of the book with little beating around the rational-agent bush. A couple of connected anecdotes start us off and we quickly get to the first of 25 chapters, each on a single bias, that make up the body of the text.

The book is very readable, and even if you already know what the fundamental attribution error, the pratfall effect and Veblen goods are, you'll probably still enjoy the stories and quotes that illustrate them. I hadn't heard of some of the experiments and anecdotes that Rich discusses - and he and his colleagues have carried out many of their own original tests - so even as a professional in the field there is much here that's worthwhile.

Structuring …

A program for cognitive economics

I’m visiting the American Economics Association conference in Philadelphia this weekend and looking forward to catching up with the latest in theoretical and empirical research. Behavioural economics has received another endorsement this year with Richard Thaler’s receipt of the Nobel Prize. The behavioural field still has only a small minority of the conference’s papers, but many more than a few years ago. It finally feels like an accepted part of the broader field.
Echoes of a new discipline have started to emerge. Miles Kimball published a detailed NBER working paper in 2015 that defined cognitive economics as “the economics of what is in people’s minds”. Before that, a book and conference in 2004 discussed the topic, and a few others (including Marco Novarese and myself, here and here) have discussed it in the meantime. It seems that the term has been invented more than once in parallel - the term is after all a natural counterpart to "behavioural" economics.
The field i…