Behavioral Economics
Behavioral economics is a field that combines insights from psychology and economics to understand how individuals make decisions. It recognizes that people's choices are influenced by cognitive biases, emotions, and social factors, which traditional economic models often overlook. By incorporating these behavioral insights, economists can better explain and predict real-world economic behavior, leading to more effective policy interventions and market designs.
8 Key excerpts on "Behavioral Economics"
- Gideon Keren, George Wu, Gideon Keren, George Wu(Authors)
- 2015(Publication Date)
- Wiley-Blackwell(Publisher)
...28 Behavioral Economics: Economics as a Psychological Discipline Devin G. Pope University of Chicago, Booth School of Business, USA Justin R. Sydnor School of Business, University of Wisconsin, USA Introduction Behavioral Economics is a relatively new field of economics that attempts to incorporate insights from psychology into economic models and analyses. The field has grown rapidly since the early 2000s and has produced a large amount of both theoretical and empirical research. The goal for this chapter is to review recent empirical findings in Behavioral Economics in order to provide the reader with a broad sense for where psychology has begun to permeate the economic discipline. It is worth starting, however, with a quick review of what economics is and why incorporating psychology is a relatively recent phenomenon. Like psychologists, most economists study how individuals behave and interact. However, where psychologists are often interested in understanding the deep underpinnings of those behaviors at the level of the individual or social group, the primary interest in economics is usually in understanding how behavior and interactions play out in a system to shape economic outcomes. Economists are interested in system-level outcomes, such as the level and path of wages, the effect of taxes on economic output, how rates of savings respond to interest rates, and so on. Those economic outcomes, of course, depend on complex interactions of individuals. Economists have traditionally made traction on understanding these complex economic outcomes by developing mathematical models that allow them to map out and quantify economic dynamics. Most of these economic models are grounded in a utility framework (see Stigler, 1950, for a history of utlility theory) that assumes individuals’ preferences can be represented by a “utility function” that maps consumption of goods and services to levels of “utility” (i.e., happiness, satisfaction)...
eBook - ePub- Morris Altman(Author)
- 2012(Publication Date)
- For Dummies(Publisher)
...Behavioral Economics is concerned with the decision-making processandthe choices people make, paying special attention to the realism ofsimplifying assumptions(the bare-bones assumptions of economic models; see Chapter 2 for details).In the past, neither approach has paid much attention to how the brain helps us understand decision making. The focus has mainly been on what researchers can see, on what’s tangible. Increasingly, behavioral economists are examining not only how the brain is structured but also how the brain works as an additional tool to help understand people’s economic behavior and improve the power of our economic models.Neuroeconomics is one of the newest components of Behavioral Economics. It involves the study of the brain and how the brain impacts our understanding of economic behavior. So far, neuroeconomics has largely reiterated the empirical finding of Behavioral Economics that people typically don’t behave according to conventional wisdom. It also suggests that some unconventional behavior is hardwired in the brain.An important focus of neuroeconomics is the use of brain-imaging technology to measure people’s physiological responses to economic stimuli. This technology helps map the chemistry of the brain from the perspective of economic issues, such as decision making, price changes, unfair economic treatment, trust, and cooperation. There remains considerable debate on how useful imaging studies are for mapping or explaining economic behavior.Neuroeconomics also focuses on the study of brain-damaged individuals to figure out how the loss of functionality of certain parts of the brain affects decision-making capabilities. This area of study has been particularly important in determining the significance of the emotional side of the brain in day-to-day decision making.Many scholars study the brain to determine if people behave in a manner inconsistent with the predictions of conventional economics...
eBook - ePub- Graham Mallard(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...1 Behavioural economics and bounded rationality The discipline of political economy (or ‘economics’, as it has been known since the turn of the twentieth century) has always overlapped with that of psychology. Indeed, being the ‘science which studies human behavior as a relationship between given ends and scarce means which have alternative uses’ (Robbins, 1932: 16), this overlap is unavoidable. Avineri (2012), for example, argues that in his Theory of Moral Sentiments (1759), Adam Smith asserted the importance of psychological insights for understanding individual economic behaviour, including notions such as habits and customs, and also concerns about social wealth, fairness and justice. Then in March 1979, with the publication of the article ‘Prospect theory: an analysis of decision under risk’by Daniel Kahneman and Amos Tversky, this overlap between these two disciplines experienced a dramatic turn: it became a field of study in its own right and the discipline of behavioural economics was born, which focuses explicitly on the study of economic decision-making and on issues such as those raised 150 years ago by the founder of modern economics. Only four years later, the first conference dedicated specifically to the new field was held at Princeton University (Frantz, 2004), securing its place in the economics discipline. Over the past thirty-five years, and particularly in the last decade, behavioural economics has experienced astonishing growth as a separate field of economics...
eBook - ePubConsumer Behaviour
Perspectives, Findings and Explanations
- John O'Shaughnessy(Author)
- 2012(Publication Date)
- Bloomsbury Academic(Publisher)
...It finds its contemporary expression in the techniques of multivariate analysis in statistics. But those economists in the field of Behavioral Economics have been adept at adopting experimental approaches, modeled after experimental psychology, as they seek explanations of ‘irrational’ behavior. This is its major departure from mainstream economics where talk of experimental design and experimental and control groups is foreign. One of the more popular books on Behavioral Economics designed for public consumption is Dan Ariely’s Predictably Irrational (2008), and one of the most prominent economists supportive of Behavioral Economics is Larry Summers, ex-President of Harvard University and ex-senior economic adviser in the Obama administration. Behavioral Economics seeks to explain errors in judgment and reasoning among all economic agents (including consumers) that result in making non-rational decisions. It originated as a hybrid of economics and social or cognitive psychology. Behavioral Economics, like the behaviorists, is acutely sensitive to the desire for instant gratification and the conflict between this notion and the forbearance needed to reap greater rewards in the future. In fact Adam Smith himself, and later the Cambridge economist Arthur Pigou, stressed the consumer’s preference for instant gratification rather than deferring satisfaction. There is an acceptance that most actions are driven by immediate desires and are not the result of well thought out deliberations. Thus it is hardly rational to get into heavy debt with credit cards when orthodox economics claims that rational long-term self-interest guides behavior...
eBook - ePub- Ensar Yılmaz(Author)
- 2020(Publication Date)
- Routledge(Publisher)
...7 Human behavior 7.1 Introduction People act in an economic and social sphere by trying to understand the things around them. Their actions result from a combination of certain cognition, motives and emotions. In this sense, they prefer to cooperate or compete with each other, and trust or distrust each other. Individual behavior is dynamic, endogenously influenced by the environment in which people participate. There is always an interactive connection between their sentiments and the outcomes realized in their economic or social environment. They behave differently from the typical “rational actors” depicted in economics. Since the human factor is analyzed in mechanistic terms in mainstream economics, it does not contain much of a psychological element. The individuals in neoclassical economic models are abstract and primarily motivated by selfish motives. Behavioral economists regard this sort of modeling of human behavior as a significant failure. In fact, people have more complicated personalities. Their decisionmaking process is mostly under the influence of psychological factors rather than rationality. Therefore assumptions regarding behavioral biases should be incorporated into economic models to capture the tendencies in real human behavior. Nowadays many economists have started to assert that realistic economic analysis is beyond neoclassical reasoning, and thereby they integrate insights from Behavioral Economics that emphasize heuristic biases and cognitive issues. Particularly with the global crisis of 2007–2008, many scholars recognized the importance of behavioral biases as a contributing factor to the crisis. Furthermore, they focused more on historic episodes of destabilizing speculation...
eBook - ePubThe Decision-Making Blueprint
A Simple Guide to Better Choices in Life and Work
- Patrik Edblad(Author)
- 2019(Publication Date)
- Patrik Edblad(Publisher)
...PART 1: INTRODUCTION The Secrets to Great Decision-Making Throughout history, standard economic theory was dominated by the model of “homo economicus”: the economic man. According to that model, humans are self-interested, intelligent, and analytical beings who can control their feelings and impulses. The economic man constantly evaluates all the facts, weighs the costs and benefits, and makes rational decisions to maximize personal well-being. This view of humans as cold and rational calculators provides a convenient foundation for economic theories. The only problem? No such person exists. The Fall of Homo Economicus It turns out that people often make decisions that don’t deliver the best outcomes. Sometimes, we even make choices that we know will hurt our future prospects. The first researchers to study these peculiar tendencies extensively were psychologists Daniel Kahneman and Amos Tversky. In the early 1970s, they started investigating the psychology involved in decision-making and running experiments to test their hypotheses. Over the coming years, they compiled a long list of well-documented irrational behaviors, and in 1979 they published their key paper, “Prospect Theory: An Analysis of Decision Under Risk.” 1 Their findings caused a lot of controversy, especially among economists looking to protect their worldview. But Kahneman and Tversky stood their ground, and their work eventually marked the start for a new field of study. The Rise of Behavioral Economics Behavioral Economics is a subfield of economics that studies how psychological, social, and emotional factors influence decision-making. The fundamental principle of this discipline is that people make systematic errors in their thinking. Behavioral economists have found that the vast majority of our choices aren’t the result of careful calculations...
eBook - ePub- Maria Alejandra Madi(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...This applicability is justified by the principles of Libertarian Paternalism where interventions impose almost no costs on rational individuals and preserve their freedom of choice. In view of the methodological background of behavioural economics, a relevant topic for our analysis is whether economic policy-making should rely on the results of laboratory experiments and the interests are hidden behind. The experimental setup The transportation problem Today, behavioural science, aims to identify patterns of individual behaviour. Its evidence-based scientific rigor is focused on causality: different behaviours are responses to identifiable stimulus and occur in a systematic pattern that supports predictions (Monsell 2017). In accordance with the situational determinism in behavioural economics, human behaviour is influenced by the framing of choices, that is to say, it is context-dependent (Mäki 2003, 17). Then, there is the belief that researchers can make predictions about human’s conscious behaviour. As Liam Monsell (2017) argues, the dual challenge facing behavioural science is to formulate a theory that reflects real human behaviour in economic decision making, but also to acknowledge the limitation of the results of randomized control trials (RCTs) when extrapolating to other contexts. Taking into account the relations between economics and psychology, Stefan Heidle (2014) states that psychology is treated as a mere add-on to mainstream economics and, therefore, behavioural economics faces the same methodological limitations...
eBook - ePubEconomics for an Information Age
Money-Bargaining, Support-Bargaining and the Information Interface
- Patrick Spread(Author)
- 2018(Publication Date)
- Routledge(Publisher)
...Rational decision-making is still the dominant assumption regarding conduct in the real world. But behavioural theory has already left the laboratory and been put to use in business. The Bank recognises that much behavioural theory is already established and used in a commercial context, and that its application in the context of economic development has lagged behind its commercial use: Engineers, private firms, and marketers of all stripes have long paid attention to how people actually make decisions, to the role that context and social preferences play in our decision making, and to the use of mental shortcuts and mental models to filter and interpret information. The development community is beginning to do the same. 64 Beyond the confines of theory making, human psychological understanding, as derived from behavioural theory, is put to profitable use in money-bargaining. Theory has to catch up with observed practice. The Bank’s understanding of the overall significance of behavioural theory is summed up as follows: From the hundreds of empirical papers on human decision making that form the basis of this Report, three principles stand out as providing the direction for new approaches to understanding behaviour and designing and implementing development policy. First, people make most judgments and most choices automatically, not deliberatively: we call this ‘thinking automatically’. Second, how people act and think often depends on what others around them do and think: we call this ‘thinking socially’. Third, individuals in a given society share a common perspective on making sense of the world around them and understanding themselves: we call this ‘thinking with mental models’. 65 The Bank translates the psychological traits identified by behavioural psychologists into a macroeconomic context, retaining the idea that these features are adjunct to economic theory...
