Economics
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.
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eBook - PDFDigital Privacy
Theory, Technologies, and Practices
- Alessandro Acquisti, Stefanos Gritzalis, Costos Lambrinoudakis, Sabrina di Vimercati, Alessandro Acquisti, Stefanos Gritzalis, Costos Lambrinoudakis, Sabrina di Vimercati(Authors)
- 2007(Publication Date)
- Auerbach Publications(Publisher)
Behavioral Economics studies how individual, social, cognitive, and emo-tional biases influence economic decisions. This research is predominantly What Can Behavioral Economics Teach Us about Privacy? 369 based on neoclassical models of economic behavior, but aims to integrate rational choice theory with convincing evidence from individual, cognitive, and social psychology. Behavioral economic models often abandon some of the tenets of rational choice theory: that agents possess consistent prefer-ences between alternatives, choose the utility maximizing option, discount future events consistently, and act upon complete information or known probability distributions for all possible events. In fact, behavioral mod-els expand the economic modeling toolkit by addressing many empirical phenomena, such as how our innate bounded rationality limits our ability to exhaustively search for the best alternative and how the framing of a scenario or a question may influence an individual’s reaction to it. It also addresses how heuristics often replace rational searches for the best pos-sible alternative and how biases and other anomalies affect the way we compare alternatives, perceive risks, or discount values over time [7,19]. In this section, we present a number of themes analyzed in the behavioral literature and discuss their relevance to privacy research, either by making reference to current results or by proposing possible paths of research. 18.3.1 Helping Individuals Understand Risk and Deal with Bounded Rationality Consumers will often be overwhelmed with the task of identifying pos-sible outcomes related to privacy threats and means of protection. Even more so, they will face difficulties in assigning accurate likelihoods to those states. Policymakers often suggest that providing more information to con-sumers will help them make better decisions and avoid those impediments.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
84 Behavioral Economics N ATHAN B ERG University of Texas-Dallas B ehavioral economics is the subfield of economics that borrows from psychology, empirically tests assumptions used elsewhere in economics, and provides theories that aim to be more realistic and closely tied to experimental and field data. In a frequently cited survey article, Rabin (1998) describes behavioral eco-nomics as psychology and economics, which is a fre-quently used synonym for Behavioral Economics. Similarly, Camerer (1999) defines Behavioral Economics as a research program aimed at reunifying psychology and economics. Definitions and Naming Problems Reunification is a relevant description because of the rather tumultuous relationship between psychology and economics in the arc of economic history. A number of preeminent founders of important schools of economic thought, including Adam Smith, wrote extensively on psy-chological dimensions of human experience and economic behavior, while later economists sometimes sought explic-itly to exclude psychology from economic analysis. For example, Slutsky (1915/1952), whose famous equation is taught to nearly all upper-level microeconomics students, sought to erect a boundary excluding psychology from economics: If we wish to place economic science upon a solid basis, we must make it completely independent of psychological assumptions (p. 27). Although historical accounts vary, one standard narra-tive holds that in the twentieth century, neoclassical econo-mists made an intentional break with psychology in contrast to earlier classical and institutional economists who actively integrated psychology into their writings on economics (e.g., Bruni & Sugden, 2007). In twentieth-cen-tury economics' break with psychology, one especially important source is Milton Friedman's (1953) essay.
eBook - PDFMarconomics
Defining Economics through Social Science and Consumer Behavior
- Ken R. Blawatt(Author)
- 2016(Publication Date)
- Emerald Group Publishing Limited(Publisher)
The Cambridge Dictionary 5 tells us that bounded rationality is “ the theory that says people can understand only a limited amount of information within a limited amount of time, and for this reason they do not always make the best decisions, especially in complicated situations. ” Behavioral Economics As a consequence and in an effort to improve micro-tools, innova-tive economics researchers incorporated psychological factors with the hope of adding a more robust outcome to their calculations. It has been expected that “ Behavioral Economics ” with the new “ interdisciplinary study of the interface, or sometimes the gap, between economics and psychology, ” 6 will move the discipline toward a realistic tableau that would better explain individual eco-nomic behavior. One of the more renowned efforts was developed by Kahneman and Tversky 7 who advanced their Prospect Theory explaining how certain psychological factors might influence an economic outcome. 4. Simon (1955) . 5. Cambridge Dictionaries Online (2015) . 6. Lea (2001) . 7. Kahneman and Tversky (1979) . The Emergence of Behavioral Economics 115 Now, these two researchers were not economists. They were psychologists who came to realize that human factors were an important part of economic decision-making. They found that peo-ple are more affected by losses than by gains, for example, and most people are loss averse. We do not want to take a chance on winning something larger if it means that something smaller, which we have in our possession is at risk; you don ’ t want to lose what you have. Another researcher 8 found that individuals are more short-term than long-term oriented, discounting future rewards in favor of the short-term gain. People tend to prefer a lower return in the present to a greater reward later and these kinds of behaviors should be taken into account. Economic behaviors are at work as we purchase, save, donate, invest, work, and even gamble.
eBook - PDFPrinciples of Behavioral Economics
Bringing Together Old, New and Evolutionary Approaches
- Peter E. Earl(Author)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
1 What Is Behavioral Economics? 1.1 Introduction A recurring theme in this book is the necessity of recognizing that people differ in how they see things. This applies not merely to, say, how they see a particular product, job opportunity or business strategy but also to how economists characterize Behavioral Economics. It is possible to get a sense of this by comparing my 1988 characterizations of Behavioral Economics (in the introduction to Earl, 1988) with those offered later by Tomer (2007) and Thaler (2015) or by contrasting the coverage in textbooks such as Baddeley (2013), Cartwright (2014), Dhami (2016) and Wilkinson (2012). What Behavioral Economics has been taken to be has changed over the years, with a particularly major change occurring in the last two decades of the twentieth century. But historical accounts of this differ, too: see Sent (2004) and Heukelom (2014). There is not even a consensus about when the first “behavioral” contributions to economics were made. In this book, the oldest sources referred to are Adam Smith’s Theory of Moral Sentiments, published in 1756, and his history of astronomy, published posthumously in 1795; otherwise, the earliest sources come from the period 1870–1910. However, it was not until after World War II that the adjective “behavioral” started being applied to some contributions to economics, most notably George Katona’s pioneering attempts to apply psychology to understanding macroeconomic phenomena (e.g., Katona, 1951) and Herbert Simon’s (1955) work on decision-making. Simon’s con- tributions earned him the 1978 Alfred Nobel Memorial Prize in Economics Sciences, but nowadays it is common to see his work being completely ignored by those who call themselves behavioral economists. Simon’s focus was on decision-making in organizations, and it led to the development of a “behavioral theory of the firm” by his colleagues Richard Cyert and James March (1963).
- John F. Tomer(Author)
- 2017(Publication Date)
- Edward Elgar Publishing(Publisher)
53 5 Psychological economics: important further developments This chapter deals with a number of important developments in the psychological economics area. This chapter’s four main sections are each concerned with how an important neoclassical economics (NE) behavioral assumption is flawed and how research efforts by behavioral economists have led to greater accuracy and realism in understanding human behavior. The effect of emotions on judgment and decision making As indicated in Chapter 2, neoclassical economists conceive of deci- sion making as a cognitive process in which decision makers focus on the value of alternative actions in order to determine which action is optimal and should be chosen. NE decision makers are assumed to make their decisions entirely in a dispassionate manner. In Kahneman and Tversky’s early decision theory research on heuristics, biases, and prospect theory, they also essentially conceive of decision making as a cognitive process (Loewenstien and Lerner 2003, p. 619). Where the psychological economics (PE) of Kahneman and Tversky differs from NE with respect to decision making is that PE identifies and explains about the “cognitive errors that people make when they judge the like- lihood of future consequences” (p. 619; Angner and Loewenstein 2007, pp. 50–51). In recent decades, PE researchers, most notably George Loewenstein, have led the way in explaining how non-cognitive fac- tors, such as emotions, are a very important influence on judgment and decision making. In Loewenstein’s view, emotions, typically ones “experienced at the time of decision making, . . . often propel [people’s] behavior in directions that are different from that dictated by a [dis- passionate] weighing of the long-term costs and benefits of disparate actions” (Loewenstein 2000, p. 426). So understanding humans’ emo- tions is certainly essential to understanding human decision making.
eBook - PDFBehavioral Economics
A History
- Floris Heukelom(Author)
- 2014(Publication Date)
- Cambridge University Press(Publisher)
182 Building and Defining Behavioral Economics or ecological terms. Taking this approach and the results of the experiments seriously would imply not only that to a large extent, individual prefer- ences are determined by the environment and by learning, but it would also undermine the notion of fixed norms in behavioral decision research and well-defined rationality in economics. It is probably due to these exten- sive implications that behavioral economists involved in the project, such as Colin Camerer and Ernst Fehr, substantially reduced their involvement with the network. Understanding Behavioral Economics in Terms of Rationality When Behavioral Economics expanded, behavioral economists were both faithful to the Kahneman and Tversky legacy while at the same time they sought to broaden its scope. Problematic in this regard were the labels of normative and descriptive, which were considered confusing in an eco- nomic context that already had created its own understanding of these concepts (e.g., Friedman, 1953). As a consequence, behavioral economists in the 1990s and 2000s reinterpreted the normative-descriptive distinction in terms of rationality. Thaler was well aware of the fact that the rein- terpretation of economics in terms of normative versus descriptive raised the question concerning the definition of the descriptive theory when the normative theory is about rational behavior. However, Thaler was not very specific, or at least he did not offer a conclusive answer. Thaler referred to behavior that deviates from the normative solution on a number of occasions as “irrational” or “nonrational.” Furthermore, he noted that he “would not want to call such choices rational” (Thaler, 2000, p. 138). On other occasions, Thaler referred to the normative-descriptive distinction as rational versus emotional (see, e.g., Shefrin and Thaler, 1988, p. 611).
eBook - PDF- D. Ross(Author)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
12 Psychologists study many phenomena that are not choice phenomena. Economists study only choice phenomena. 250 Philosophy of Economics On this view of the difference between the disciplines, behavioral economists are scientists who study comparative valuation, like econo- mists do, but have decided to take up psychology rather than economics. (Of course, I don’t deny that one and the same scientist could sometimes do economics and sometimes do psychology. 13 ) But I think that it would be a positive development for methodological clarity if the label ‘Behavioral Economics’ semantically evolved into the label ‘psychology of reward valuation.’ Of course neo-Samuelsonian economists, taking heterogeneity of utility functions seriously as a key property of data- generating processes at market scales, will continue to perform experi- ments using individual human (and non-human animal) subjects. But their methods differ in telltale ways from those typical of behav- ioral economists. Neo-Samuelsonians typically require larger subject pools because their aim is to use econometric estimation to reveal the structure of heterogeneity with respect to maximization of expected utility within populations. We can contrast this with the objective of most work in ‘Behavioral Economics’ to explain central tendencies in a population by reference to cognitive dispositions or biases common to individual members of the population. This reflects different policy motivations. The neo-Samuelsonian experimental economist aims to predict the consequences of heterogeneity for policies or interventions at the population scale; the behavioralist is typically more interested in prospects for useful advice that might be given to individuals.
eBook - PDFGames and Human Behavior
Essays in Honor of Amnon Rapoport
- David V. Budescu, Ido Erev, Rami Zwick, David V. Budescu, Ido Erev, Rami Zwick(Authors)
- 2019(Publication Date)
- Psychology Press(Publisher)
SUMMARY In this chapter we have highlighted the major differences between the traditional economic and psychological approaches to the study of choice behavior, and summarized some recent trends in both disciplines. Our analysis sugges ts that the gap between economists and psychologists on some of these dimensions appears to be shrinking. Researchers in both disciplines tend to agree that: (a) in most cases both environmental and mental resources are scarce, (b) the strong assumption of rationality should be weakened, (c) some of the important effects of incentives can be studied conveniently by manipulating monetary outcomes, (d) framing effects cannot be ignored but their presence does not necessarily invalidate the game theoretical abstraction of the incentive structure, (e) learning is more than a justification for eq uilibrium, and (f) quantitative models are useful for the development of a good descriptive theory. Practically all the contributors to this volume endorse (implicitly, and in some cases explicitly) these emerging common assumptions. This is amply reflected in their experimental work and their theoretical models. We started our chapter by asking a deceptively simple question Can psychologists a nd economists cooperate in the study of human decisions in social and interactive contexts? Although we can not conclude it with an equally simple answer, we are encouraged by the recent developments in experimental economics and behavioral decision theory, and we hope that in the not-too-far future, the answer will be an unqualified yes. We hope that the collection of chapters in this book contribute toward this end. 18 ZWICK, EREV, AND BUDESCU ENDNOTES 1. Camerer (1995, 1996), for example, emphasized that the difference between psychological and economic experiments should not be overstated. There is a substantial overlap across disciplines in methods and substantial variation within disciplines.
eBook - PDF- Ricardo F. Crespo(Author)
- 2017(Publication Date)
- Routledge(Publisher)
18 Infante, Lecouteux and Sugden (2016) have criticized Behavioral Economics for considering that context-dependent choices are mistakes and need to be “purified” by rational reflection, as well as Hausman’ s (2012) presumed agreement on this need for “purification.” In his response, Hausman (2016: 30–31) has expressed his differences with Behavioral Economics. The way in which he formulates choice theory, asking “what do I have most reason to do?” (2012: 5), seems to refer to classical practical reason. However, the requirements he imposes on preferences – transitivity, completeness and context-independence – pertain to the logic of instrumental reason. 19 In addition, Kahneman’ s poor conception of happiness, fundamentally hedonist and physiologically measurable, is consistent with this domestication (see Kahneman 2000). 20 See Barton and Grüne-Yanoff (2015) for a classification. 21 On the relation of this list with Nussbaum’ s proposal of a list of goods (e.g., 2003) see Chapter 7 of this book and Crespo (2013: 56–62). 22 My thanks to Andrea Klonschinski for letting me know about this paper and for sending it to me. References Alexandrova, A. (2005). “Subjective Well-Being and Kahneman’ s ‘Objective Happiness, ’ Journal of Happiness Studies 6/3: 301–324. Angner, E. and G. Loewenstein (2012). “Behavioral Economics.” In U. Mäki (ed.) Philosophy of Economics, Handbook of the Philos Sci, 13, North Holland: Elsevier. Barton, A. and T. Grüne-Yanoff (2015). “From Libertarian Paternalism to Nudging– and Beyond,” Review of Philosophy and Psychology 6/3: 341–359. Benartzi, Sh. and R. Thaler (1995). “Myopic Loss Aversion and the Equity Premium Puzzle,” Quarterly Journal of Economics 10/1: 73–92. Boudon, R. (2004). “Théorie du choix rationnel, théorie de la rationalité limitée ou individualisme méthodologique: que choisir?,” Journal des Economistes et des Etudes Humaines 14/1: 45–62. Economics and psychology 59
eBook - PDFMicroeconomics for MBAs
The Economic Way of Thinking for Managers
- Richard B. McKenzie, Dwight R. Lee(Authors)
- 2016(Publication Date)
- Cambridge University Press(Publisher)
If we accepted all of Behavioral Economics, uncritically, in its extreme form (best represented by Ariely’s work), much of what we observe in “real life” is baffling to con-ventional economists as the conventional rationality premise is to behaviorists. Some behaviorists’ claim that humans are so often irrational and have so many controlling decision biases (without prospects of adjustments to improve decisions) that they are “predictably irrational,” then we might expect people everywhere on highways and sur-face roads would be in their travels in the midst of “demolition derbies,” with crashes the norm (because they would not be calculating, and recalculating, the costs and ben-efits of maneuvers; they would be captured by a host of irrationalities). Or we might expect people’s cars parked in mall parking lots to be more or less randomly distributed across all potential spaces (or maybe even cluster in remote parking spaces, because people don’t have the wits to undertake relative comparisons of the costs and benefits Problems with Behavioral Economics 645 A of the different parking spaces). On the contrary, while wrecks on highways are not uncommon, they appear to us to be far less common than we might expect if we were to believe that people are as irrational (or just non-rational) as some behaviorists claim, or just intimate. We also commonly observe cars parked in mall parking lots tending to cluster in front of entrances where shoppers believe they see net gains from their parking choices. We also might wonder how only the behaviorists are capable of understanding errant decisions and recommending corrections. If corrections at some level are not naturally forthcoming, then surely behaviorists’ notifications of people’s irrationalities should provide new and useful data to people to correct their own decisions, at least to the degree that their evolved mental constraints will allow.
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