Why Behavioral Economics Isn't Better, and How it Could Be

Abstract

What’s holding Behavioral Economics back? And what can be done about it?

The fields of Behavioral Economics and Behavioral Law and Economics have each supplied important and useful insights. But the state of knowledge has changed rapidly across the decades since Tversky and Kahneman first highlighted how people sometimes systematically depart from predictions of the standard expected utility model in neoclassical economics.

Those changes now render it uncomfortably obvious that Behavioral Economics, and those who rely on it, are falling behind with respect to new developments in other disciplines that also bear directly on the very same mysteries of human decision-making.

This chapter identifies four problems for Behavioral Economics. It explores their causes. It then suggests and illustrates ways around them, including a path for integrating multi-disciplinary insights. It provides concrete recommendations that can help to move these important schools of thought forward, in light of developments in other fields.

Keywords: behavioral economics, behavioral law and economics, cognitive heuristics, biases, endowment effect, uncertainty, risky decision-making, time-discounting rates, framing effect, reference dependence, prospect theory, loss aversion, neuroscience, evolution, cognitive neuroscience, psychology

JEL Classification: D80, D81, D90, B25, K00, K11, K12, K13, K14, K42