Behavioral Economics

Abstract:     
Behavioral economics is the effort to increase the explanatory and predictive power of economic theory by providing it with more psychologically plausible foundations. Behavioral economics, which recently emerged as a bona fide subdiscipline of economics, raises a number of questions of a philosophical, methodological, and historical nature. This chapter offers a survey of behavioral economics, including its historical origins, results, and methods; its relationship to neighboring fields; and its philosophical and methodological underpinnings. Our central thesis is that the development of behavioral economics in important respects parallels the development of cognitive science. Both fields are based on a repudiation of the positivist methodological strictures that were in place at their founding and a belief in the legitimacy of making reference to unobservable entities such as beliefs, emotions, and heuristics. And both fields adopt an interdisciplinary approach, admitting evidence of many kinds and using a variety of methods to generate such evidence. Moreover, there are in fact more direct links between the two fields. The single most important source of inspiration for behavioral economists has been behavioral decision research, which can in turn be seen as an integration of ideas from cognitive science and economics. Exploring the parallels between the two endeavors, we attempt to show, can shed light on the historical origins of, and the specific form taken by, behavioral economics.

Keywords: Behavioral Economics, Cognitive Science, History, Philosophy, Methodology

JEL Classifications: B20. B40, D00, D60

Working Paper Series