Chapter 84: Behavioral Economics

Nathan Berg

Behavioral economics Behavioral 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 economics as “psychology and economics,” which is a frequently used synonym for behavioral economics. Similarly, Camerer (1999) defines behavioral economics as a research program aimed at reunifying psychology and economics. 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 psychological dimensions of human experience and economic behavior, while later economists sometimes sought explicitly to exclude psychology from economic analysis. For example, Slutsky (1915/1952), whose famous equation is taught to nearly all upper-level microeconomics students, ...

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