Routledge Handbook of Behavioral Economics

Roger Frantz, Shu-Heng Chen, Kurt Dopfer, Floris Heukelom, Shabnam Mousavi, Roger Frantz, Shu-Heng Chen, Kurt Dopfer, Floris Heukelom, Shabnam Mousavi

• Publisher: Routledge
• Year: 2016
• Print ISBN:
  9781138821149
• eBook ISBN:
  9781317589235
• Topic: Economics
• Subtopic: Business General
• Index: Economics

There is no doubt that behavioral economics is becoming a dominant lens through which we think about economics. Behavioral economics is not a single school of thought but representative of a range of approaches, and uniquely, this volume presents an overview of them.

The wide spectrum of international contributors each provides an exploration of a central approach, aspect or topic in behavorial economics. Taken together, the whole volume provides a comprehensive overview of the subject which considers both key developments and future possibilities.

Part One presents several different approaches to behavioural economics, including George Katona, Ken Boulding, Harvey Leibenstein, Vernon Smith, Herbert Simon, Gerd Gigerenzer, Daniel Kahneman, and Richard Thaler. This section looks at the origins and development of behavioral economics and compares and contrasts the work of these scholars who have been so influential in making this area so prominent. Part Two presents applications of behavioural economics including nudging; heuristics; emotions and morality; behavioural political economy, education, and economic innovation.

The Routledge Handbook of Behavioral Economics is ideal for advanced economics students and faculty who are looking for a complete state-of-the-art overview of this dynamic field.

PART I Scientists in the field of behavioral economics

Introduction

The first and last articles in Part one are of a broader nature about the history of behavioral economics: Peter Earl, “The evolution of behavioural economics,” and Morris Altman, “A bounded rationality assessment of the new behavioral economics.” Earl’s chapter, which opens the book, goes into more detail about the history/evolution of behavioral economics. Alfred Marshal is older than “old” behavioral economics, but the others Earl discusses are old behavioral economics: Simon, Leibenstein, Baumol, Winter, Katona, and Shackle. The “new” behavioral economics that he discusses is Kahneman and Tversky, and Thaler and Sunstein. The New York Times in 2001 may have implicitly declared the “old behavioral economics to be irrelevant,” but Earl obviously disagrees. Altman’s chapter is much more focused on the relative strengths and weaknesses of two approaches to behavioral economics. The old behavioral economics of Simon or the new behavioral economics of Kahneman and Tversky. Altman also discusses Vernon Smith, Akerlof, and others. Altman appreciates both the old and the new behavioral economics but when push comes to shove he prefers Simon’s approach.

There are two chapters on George Katona. Richard Curtin was a student and friend of Katona where both worked at the University of Michigan. Richard Curtin’s chapter, Chapter 2, “George Katona: a founder of behavioral economics,” reviews Katona’s career in behavioral economics beginning in the 1940s, but does more than that. He shows how Katona’s idea of frames of reference preceded Kahneman and Tversky’s idea of framing by 25 years, and how his ideas of intervening variables preceded Akerlof’s ideas on intervening variables by 50 years. These facts should not go unnoticed by anyone interested in the “real’ history of behavioral economics. Hamid Hosseini’s chapter, “George Katona’s contributions to the start of behavioral economics,” Chapter 10, shows that Katona was writing about psychology and business decisions as early as 1945, and that in 1977 the American Psychological Association acknowledged Katona with developing a new field of research bridging the gap between psychology and economics. Hosseini also shows the various ways in which Katona’s research methodology and underlying assumptions were different in several respects from the then standard neoclassical theory. Finally, Hosseini discusses why economists affiliated with the Cowles Commission did not appreciate Katona’s work, while others such as James Tobin acknowledged the debt owed to Katona by the economics profession.

Ken Boulding is the subject of Stefan Kesting’s chapter, Chapter 3, titled “Ken Boulding: the image as a precursor to framing?” Similar to Curtin putting Katona’s work in historical perspective with younger behavioral economists, Kesting shows how both Boulding’s image, and Kahneman and Tversky’s concept of framing rely on mental accounting, with Boulding preceding the latter by about 25 years. Chapter 4 focuses on Harvey Leibenstein, who similar to Boulding began writing about behavioral economic themes in the 1950s. Leibenstein’s work in the area of behavioral economics began with his 1950 article on the social context of individual decision making, specifically how others’ behavior served as intervening variables between prices and quantities demanded. Akerlof discussed this in 2007, while Vernon Smith discussed it in his book, Rationality and Economics in 2009, both writing almost 60 years after Leibenstein’s 1950 QJE article. Of course, the focus of the chapter is Leibenstein’s X-efficiency theory, a theory which attempted to ask what are the implications for economic theory when we drop the assumptions of perfect rationality, maximizing behavior, and efficiency as meaning only allocative efficiency. Leibenstein dropped all three and opened the “black box” which is the neoclassical/non-behavioral economics firm. These three are also the foundations of the then neoclassical theory, and which helped open the conversation for a later advancement, not a beginning, of behavioral economics.

There are four papers discussing the work of Herbert Simon. One is Altman’s paper which we have already mentioned. The paper by Grebel and Stützer, “Schumpeter, Kirzner, Knight, Simon, and others: behavioral economics and entrepreneurship,” Chapter 13, mentions Simon’s theory of bounded rationality as the reason why entrepreneurs are not globally rational. The third paper is by Esther-Mirjam Sent, Chapter 5. Sent’s paper discusses Simon’s contributions, including his work on: complex hierarchical systems; aggregation, causality, and identifiablility in econometrics; cognitive psychology; artificial intelligence; bounded rationality; and his differences with Kahneman and Tversky. Chapter 12 is by Manuel Scholz-Wäckerle, a Senior Lecturer of Socioeconomics in Vienna University, and is about “meso behavior.” Meso behavior is defined/described as

a particular kind of economic behavior that is not integral part of the homo oeconomicus model. This behavior is called meso because it is neither part of micro-nor of macroeconomics alone and it is shaped systemically through interactive socio-economic associations. Thereafter meso is characterized through structure as well as process components of dynamic change.

In the fourth section it is shown that Veblenian and Schumpeterian agents are basically acting in terms of Simon's approach to satisficing behavior, a “precondition for…meso-structured behavior.” Scholz-Wäckerle also discusses meso behavior in the writings of 2009 Nobel Prize winner Elinor Ostrom. Elinor Ostrom is also featured in Chapter 11, “Behavioral rules: Veblen, Nelson–Winter, Ostrom, and beyond” by Georg Blind.

Two chapters are on the founders of experimental economics: Reinhard Selten and Vernon Smith, Selten’s work beginning in the late 1950s and Smith in the early 1960s. Selten received the Nobel Prize in 1994 and Smith in 2002. Selten’s work was applied to both fully rational and not-so-fully rational players. His work with C. C. Berg in 1970 described framing, 11 years before the same concept was published by Kahneman and Tversky. In Chapter 6 Rosemarie Nagel et al. describe Selten as a “dualist” because he presented economics from both a normative (assuming rationality) and a descriptive (conducting experiments and developing behavioral models) approach. In Chapter 7 Shabnam Mousavi presents Vernon Smith and Gerd Gigerenzer on ecological rationality and heuristics. She compares Smith and Gigerenzer with respect to ecological rational, bounded rationality, heuristics and experiments.

Floris Heukelom provides chapters on two more recent names in the history of behavioral economics: Richard Thaler (Chapter 8), and Daniel Kahneman (Chapter 9), winner of the Nobel Prize in 2002. Heukelom takes us chronologically through Kahneman’s very productive career, saying that “it is easy to observe that the central idea in Kahneman’s work is that human decision making is best understood as the combined outcome of two cognitive systems,” which Kahneman refers to as System 1 and System 2. Heukelom also takes us chronologically through Thaler’s career, saying that

one could argue that Thaler’s economic world view has been remarkably constant over the course of his career of now almost forty years. Economic theory tells us how we should behave in the economy, and economists should be more concerned with finding out if and when people behave along those lines. If not, economists should devise ways to help individuals do so.

1 The Evolution of behavioural economics

Peter E. Earl

DOI: 10.4324/9781315743479-1

Introduction

There are many ways in which one might tell the story of behavioural economics. It has a much longer history than many of its current proponents realise, a history that behavioural economics itself can be used to understand (for an early attempt to offer a reflexive analysis of the state of behavioural economics, see Earl, 1983a). If judging purely from the advance reviews by Chip Heath and Daniel Kahneman of Richard Thaler’s (2015) book Misbehaving, one would believe that it was Thaler who invented behavioural economics. This might indeed be true for what nowadays typically passes for behavioural economics. However, such claims contrast sharply with the perspective offered by Baddeley (2013), who begins her textbook with a survey of psychological perspectives on choice that goes back to eighteenth-century contributions by David Hume and Adam Smith. Yet, despite such a long historical sweep, Baddeley’s account is very light on what Sent (2004) calls ‘old behavioural economics’—that is, behavioural economics pre-Thaler or recent behavioural contributions in the spirit of the ‘old’ approach. The same can be said of Cartwright (2014), who similarly sees behavioural economics as beginning with Adam Smith’s (1759) Theory of Moral Sentiments.

In the present survey, the focus is not on how ‘new’ behavioural economics has evolved but on the earlier contributions that have been left behind rather than being integrated with the new approach. The inclusion of ‘evolution’ in the title provides a clue to the approach that is taken and why the starting point is the publication of Alfred Marshall’s (1890) Principles of Economics, ninety years before Thaler’s (1980) seminal paper in the first issue of the Journal of Economic Behaviour and Organisation. Marshall not only built his analysis on his knowledge of actual behaviour, as a behavioural economist would, but he is increasingly being recognised as one of the founding fathers of evolutionary economics, a research programme that is both closely related to ‘old behavioural economics’ and is instructive for understanding how what is viewed as behavioural economics has changed since 1980.

Marshall and evolutionary analysis

Marshall’s thinking was greatly influenced by evolutionary biology (see Hart, 2013). This arm of biology views the evolution of species populations as arising via the following process: (i) genetic mutations occur, (ii) mutations affect survival chances of the organisms in which they are embodied, and (iii) a mutation may be passed down to later generations if the organism in which it is embodied breeds and its progeny survive into adulthood. Inspired by evolutionary biology, Marshall ended up concerned with the struggle of firms to get established and remain competitive in a world where gradual change, not equilibrium, was the order of the day. He thus likened the competitive struggles of firms in an industry to those of trees within a forest where many plants fail to get enough sunlight and nutrition to enable them to grow to maturity. He did not go as far as later writers, most notably Nelson and Winter (1982), who assigned to routines in economic and social systems a role akin to that of genes in biological system as the key elements that get passed from one generation to the next. Innovative routines may give a firm a competitive edge over rivals, enabling it to earn greater profits; indeed, radically different routines may greatly disrupt an established order that had been evolving steadily. If new routines are retained and come to be employed more widely (for example, via internal growth of the firm or by being spread over a wider geographical area via a franchise system), then the new way of doing business may account for a growing share of economic activity. This will continue until routines that are even better suited to passing the test of the market are developed and applied. Where Marshall emphasised gradual change, modern evolutionary economists have emphasised, via Schumpeter’s (1943) notion of ‘creative destruction’, the possibility that the history of economic systems may be punctuated by revolutionary shifts in which one way of doing business comprehensively renders another obsolete.

There are obvious parallels between the evolutionary gradualism of Marshall’s analysis and the notions of ‘normal science’ and the use of ‘scientific research programmes’ in scientific inquiry, and between the idea of game-changing new business modes and Kuhn’s (1962) analysis of ‘scientific revolutions’/‘paradigm shifts’. However, if we apply the perspective of evolutionary eco...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Contents
• List of figures
• List of tables
• List of Contributors
• PART 1 Scientists in the field of behavioral economics
• PART 2 Specific domains of behavioral economics
• Index