Allow Me to Ramble: Psycho-nomics

I feel like I’ve been hearing a lot lately about the marriage of economics and psychology. I personally love behavioral, and I feel like the two fields can each contribute something to the other – economics can contribute its understanding of endogeneity and statistical analysis, and psychology can contribute its knowledge of the very non-standard way in which our models fail to represent human behavior. If I could major in Psycho-nomics, I would!

Check this and this for some outside perspectives. It seems as though we’re seeing more psychological, qualitative variables making their way to the right hand side, and that’s really exciting. After all, we seek to quantify the unobservables – why not borrow from a field that studies them for a living?

A friend mentioned to me these cool things called Hofstede Factors, so that’s what I’m going to talk a bit about in this post. There are SO many cool psychological scales for measuring all kinds of neat qualitative variables, and I hope to learn about more of them. For now, we’ll focus on Hofstede.

Geert Hofstede was not actually a psychologist – he was a cultural anthropologist. A Dutch one, as you might guess. He basically studied tons of different countries to get a read on different aggregate measures of their culture, and came up with a couple of different measures, each on a scale of 1 to 100.

Power Distance measures how authoritarian a country is – how much people accept huge differences in power and defer to these differences. A lower PD score means that a country is more egalitarian and its citizens are more empowered. Individualism versus Collectivism is as it sounds – a country with a high score values the individual and his rights over the group. (The US was ranked first in this category!) Gender measures how much people are expected to bow to traditional gender roles. Japan ranked first in this category, with men and women very strongly attached to their traditional roles. Uncertainty Avoidance is basically how risk averse a country is – what a useful variable for an economist! Hofstede posits that countries with high UA scores value tradition and rituals, and have high levels of bureaucracy. Interestingly, Greece was number 1 – I wonder what Hofstede might have predicted about their current financial situation given their UA score. It’s not what I would have expected! Lastly, Time Orientation measures how forward-looking, investment-minded, and patient a country generally is.

I think the last two are highly relevant for economics research, but all of the factors are pretty interesting especially when put in the context of their current events. The implications of these sorts of measures are far-reaching, and you can read about my favorite example here. Korean airlines have abnormally high crash rates, and they also have a very high Power Distance scores. It was found from analyses of cockpit procedures that Korean cockpit teams were very deferential to their captains, to the point where they would not speak up when mistakes were being made. This led to – you guessed it! – crashes. Lots of them.

Crazy, huh? I’m fascinated by the translation of qualitative variables into quantitative measures, and the Hofstede factors are chief among these.

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