Experience is a teacher. Economists sometimes defend their assumptions
about rational human behaviour by resorting to just this folk wisdom. But
some decision situations occur infrequently over the course of our lifetimes, or
are simply very difficult to learn through personal experience. How can we
learn in such cases?
By cheating, say Professors Parker Ballinger, Michael Palumbo and
Nathaniel Wilcox, writing in the October 2003 Economic Journal: we can look
at what others have done. Using experimental saving games, they show that
people can acquire decision skills by observing other decision-makers.
Their important findings and potential implications:
· Decision skills can accumulate over sequences of people. Thus, social
learning of decision skills can take place.
· Social learning has long been the bedrock of theories of cultural
evolution. Yet empirical investigation of its effectiveness in the
accumulation of decision skills is new.
· Social learning of decision skills is highly uneven. This may contribute
to poverty and inequality. But decision skills may be teachable,
providing a new weapon for battling poverty and inequality.
Ballinger, Palumbo and Wilcox’s savings games are simple. A subject
receives an uncertain income of experimental funny money called ‘francs’ at
the start of each of 60 consecutive decision periods. This is added to any
francs she may have saved in past periods, and she chooses how much of
this to spend now and how much to save for future periods (no borrowing
against unknown future income is allowed). Spending francs now buys
‘points,’ but each extra franc spent buys fewer extra points in each period.
The total points purchased over all 60 periods determine her real currency
earnings from game play.
Playing this saving game well is hard. Finding the rational saving scheme for
the game is almost impossible without using a computer. No simple algebraic
expression describes it. But a subject in the experiment can observe another
subject who is currently playing this saving game – which she will soon begin
herself. In this manner, collective experience may accumulate through
sequences of subjects.
In fact, ‘first generation’ subjects (who begin without the benefit of watching
others) make quite poor decisions, as in many previous experiments on
saving decisions. But more than half of third generation subjects (the last
subjects in a session, who benefit from observation of the second subject and,
indirectly, from whatever the second subject learned by watching the first
subject) perform better than their first generation counterparts, while few
perform worse.
Aside from the fact that social learning about saving takes place, Ballinger,
Palumbo and Wilcox emphasise its highly uneven nature. First generation
subjects are all highly myopic, planning ahead three periods at most. But in
the third generation, half of subjects plan ahead three or more periods, and a
few subjects plan ahead far enough to perform nearly as well as the rational
saving scheme would. But nearly half of third generation subjects learn
nothing from their antecedents, and perform every bit as poorly as first
generation subjects do.
Could the unevenness of social learning about saving have anything to do
with poverty and inequality? The experiment cannot answer this question, but
it does suggest the possibility. Usually scholars think of these things as the
result of the normal functioning of labour and insurance markets,
supplemented by unequal endowments of valued job skills. This work raises
the possibility that unequal endowments of decision skills may also be at
work.
These skills can be learned, and so perhaps they can be taught – and this
suggests that educational tools might be available and helpful in the fight
against poverty and inequality.
ENDS
Notes for Editors: ‘Precautionary Savings and Learning Across Generations:
An Experiment’ by T. Parker Ballinger, Michael G. Palumbo and Nathaniel T.
Wilcox is published in the October 2003 issue of the Economic Journal.
Ballinger is in the Department of Economics and Finance, Rusche College of
Business
Stephen F. Austin State University, Nacogdoches, Texas.
Palumbo is in the Division of Research and Statistics, Board of Governors of
the Federal Reserve System, Washington, DC.
Wilcox is in the Department of Economics, University of Houston, Houston,
Texas.
For Further Information: contact RES Media Consultant Romesh Vaitilingam
on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com);
Nathaniel Wilcox on +1-713-743-3840 (email: nwilcox@mail.uh.edu); Parker
Ballinger on +1-936-468-1878 (email: pballinger@sfasu.edu); Michael
Palumbo on +1-202-452-2296 (email: mpalumbo@frb.gov).