Behavioral economics

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Behavioral economics is the field of economics that is concerned with the psychological underpinnings of individuals' economic decisions.[1] This is not limited to purely financial transactions, and can include the study of everyday social interactions. Behavioral economics can be thought of as a combination of microeconomics, psychology, and sociology. Behavioral economics can often explain how a seemingly unexpected decision or unexpected economic oucome actually makes sense.

A key insight from behavioral economics is that people do not behave rationally all the time. That is to say, people do not always make decisions that maximize their utility based on the best information available. This is significant because a key assumption of many economic models is that all economic actors act rationally. The concept of "bounded rationality" is that one's ability to make good decisions is limited by available information, mental capability, and the time available to decide.[2] This can have implications for the effectiveness of democracy.

Examples

Traditional economic models would not predict that a person would return a lost wallet or leave a tip at a restaurant he or she doesn't expect to visit again. This is because traditional economic models do not take into account human morality or altruism.

Popular Behavioral Economics Books

  • Freakonomics by Steven D. Levitt and Stephen J. Dubner
  • Superfreakonomics by Steven D. Levitt and Stephen J. Dubner
  • The Undercover Economist by Tim Hartford
  • The Tipping Point by Malcolm Gladwel
  • Blink by Malcolm Gladwell
  • More Sex is Safer Sex by Steven E. Landsburg
  • Predictably Irrational by Dan Ariely
  • The Economic Naturalist by Robert H. Frank

References

  1. Camerer, Colin and Loewenstein, George. "Behavioral Economics: Past, Present, Future." October 25, 2002. http://www.hss.caltech.edu/~camerer/ribe239.pdf
  2. Gigerenzer, Gerd and Selten, Reinhard. Bounded Rationality: The Adaptive Toolbox. August 7, 2002. MIT Press. http://books.google.com/books?id=dVMq5UoYS3YC
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