[sound]. Hi, in this lecture we're gonna step back a little bit, and we're gonna think about, how do we model people, Cuz a lot of models are gonna be concerning us are models of, you know people and groups of people like firms and governments and organizations. So, if you wanna make good models of those things, then you've gotta have good models of the parts, good models of the people. Okay. Modeling people is tricky. [inaudible]. Physicist Marie Gelmont once famously said, imagine how difficult physics would be. If electrons could think [laugh] so what did he mean human? What he meant was that you know if you take an electron or a carbon atom or even a water molecule it doesn't think it doesn't try to make sense of the world it doesn't have any goals or objectives or anything like that no beliefs so it's pretty straight forward to model how those things function when you look at people, people are much more complicated right? We're purposeful, we've got goals we've got objectives we've got things we want to do, we've got belief structures, we're messy. And because of that you just don't quite know how we're going to behave. Now on top of that we're diverse, right? We want different things. We have different goals and objectives. So this combination of sort of purposeful, thinking actors who are different means that it can be really hard to understand what they do and how they act. So how do we do it? Well, we're gonna talk about three basic frameworks. The first framework is called the rational actor model. Now in this framework, what you do is you assume that people optimize. Now, this is unrealistic, and I'll talk about this in the next lecture in some detail, but it's a good benchmark. So one way to think about it is just to assume, let's just assume people have some sort of goal, and they optimize their goal, okay? Second thing. We can assume what we call a behavioral model. Now here we [inaudible] sort of gather up all sorts of data about how real people actually do make decisions and choices and act, and then what we try to do is model people as close as possible to how real people behave. Now of course you can make it too complicated. We sort of try and include the one or two different things from perfect rationality, like the biases that people might have. Right. And the third thing that we'll look at, is even simpler. Which are sort of, ruled based models. So here what we're going to do is instead of digging really deep into psychology we're just going to assume that people follow rules, and then see how those things add up. Now, what we're gonna see is in some cases which should be three things we assume matters a lot and in other cases which should be three things we assume doesn't matters very much at all. And so, how we level people and whether it is so important that we get it exactly right is going to be a function of the particular model we are playing with. Look at that little bit later on [inaudible]. First let me a lil bit more back. So, how does that rational active model work? In rational active model you assume there is an objective function. It'll be a is a mathematical function you know someone is trying to. Maximize, right. So that could be if you're a person, maximizing happiness or utility. If you're a firm it could be maximizing profits or market share. Or if you're a gov, if you're running for office it could be maximizing the number of votes. Then what you assume is that people optimize. Given your objective what you do is you do the optimal thing. So you take the choice that makes you as happy as possible. You make the, put a couple of decisions, get used to those votes, and you produce the product that makes you the most money. Let me, let me be more specific. So suppose you're in a [inaudible] you see something. How many hours should someone choose to work? Well, what'd you do is you'd write down a function, utility function. Say the utility depends on consumption and on leisure. And you might assume it's like this one. It's the square root of consumption times the square root of leisure. Now why would you assume that? Well, the square root function, right, starts out up and then sort of slowly falls off. So then so that means the first bit of consumption's really good but then it becomes worth less. In the first bit of leisure's really good, by the first hour of vacation's great, but by a week you're sorta ready to get back to work. So that also falls off. They've got what they call diminishing returns. So this function sorta says consumption's good but becomes less good the more you have. Leisure's good but it becomes less good the more you have. Well, this is your function, and then what you do is you just choose consumption of leisure depending on how much they cost, to maximize that. Now that may not be exactly what you, you may not be sitting at home writing down functions and you know, solving these equations for what to do, but economists sort of assume that you do that, its as if you do that. Right? You come close enough to doing that, that this is a [inaudible] model. Now the rational act comes under lot of criticism and particularly like according to. You know? Just basic data. Right? So, there's a movement in the economics called behavior of revolution that, this is also being going on in psychology for, for about a 100 years. Aiming that if you [inaudible] servicing people rational, A rational ?cause you can look and see what people do. And if you observe what people do, you'll find out that they're not rational. And they are not rational in systematic ways. Recently, this whole research pattern is been. Really propped up through evidence in neuroscience. [inaudible] You can actually look at the structure of the brain, look at how people think in particular situations, and you can see in fact, why they are thinking. In ways that the rational actor model would consider to be irrational. So, those are sort of two benchmarks. On the one hand, you can assume people are rational. On the other hand, you can assume that, well, people sorta do what people do. Now this other thing, this people doing what people do is gonna be a lot messier. [inaudible] there's a third way, and the third approach comes from, you know, again. Social scientist, but also from some computer scientist, and even some psychologist, and that is to assume that people follow rules. It's more of a Shelling model, like we didn't have a very elaborate model of how people behaved there, all we did was we just assumed that people moved out of a neighborhood if, you know the neighborhood became too much unlike them. So this is just a simple rule, and if that simple rule. Is close to what people do, that might be sufficient. To work in the model. Okay, so what do we got? We got these three basic frameworks, people optimize, people are sort of behavioral, they do what people do and people follow rules. Each of those in a given situation will give a sort of slightly different predictions about how people behave. Right? And when we start aggregating them and having them interact we can get very different conclusions. In some of the other cases where we really don't see that much of a difference depending on what we assume. But what we want to do now, these next couple lectures, is we just wanna sort of think through the logic of what a rational actor model means. Visit some of the biases that we've seen, there's that, you know, psychologists have seen when they look at how people actually behave. And then think through sort of what a rule based model might look like. And we'll conclude by sort of comparing all these in a couple of settings and see when it doesn't matter and when it really does matter. Okay. Thank you.
