What is Behavioral Economics and what will this course be like?

I expect that this course will be unlike any course you have taken at UW-L. Behavioral Economics is different than any economics that you’ve probably ever heard about or studied, but it is probably a lot closer to what you experience as a living being on this planet. If you’ve had enough econ courses, you’ve probably gotten a good dose of Neoclassical economics and its description of how people behave: using indifference curves to maximize utility, why we should ignore sunk costs, why we don’t cooperate in a prisoner’s dilemma etc. Much of this theory is based on very specific assumptions about behavior and human biology: most people make choices with the goal of maximizing their utility. But behavioral economics is different: it studies how people actually behave, not how we think people should behave.

Behavioral economics began with a debunking of neoclassical economic theory by psychologists such as Amos Tversky and Daniel Kahneman, and experimental game theorists such as Vernon Smith.  However, ideas once considered outside the realm of economics, or descriptive "anomalies" contradicting the neoclassical model, have become accepted into mainstream economics with cross-disciplinary explanations under the new heading of “behavioral economics,” also evidenced by the 2002 Nobel prize in Economics being awarded to Kahneman and Smith.  The Nobel Commission noted integrating “insights from psychological research into economic science, ... thereby laying the foundation for a new field of research” by demonstrating “how human decisions may systematically depart from those predicted by standard economic theory.”

Behavioral economists have particularly been concerned with situations in which what people actually do differs from what the rational choice model (or the neoclassical model of economic behavior) predicts what people will do. We know, for example, that people would rather get a lower salary and be the highest earner in their firm than receive a higher salary and be the lowest earner at their firm. Crazy, huh? These same people (and by "same people" I mean you and me!) will willingly give half of a months salary to a stranger in an Ultimatum Game rather than keep 90% for themselves. We don't get free money from the government because we are too lazy to walk over to the Human Resources department to sign a paper, and we'll eat carrots rather than carrot cake if some stranger puts it first in the buffet line. Talk about Freakonomics. But by exploring how people really behave and then developing models based on more accurate assumptions about human behavior, behavioral economics hopes to help design better institutions and public policies.   

Many of the insights of behavioral economics originate from evolutionary biology, evolutionary psychology and psychological models of behavior. Because of this we will be reading articles that are cross-disciplinary including a graphic novel of Charles Darwin’s theory of evolution! 

Many of the behavioral insights that economists have come to rely on experimental economics. This is a methodology that economists can use to test theories directly rather than using secondary data. Experimental economists are much more like physical scientists in that they generate hypotheses, run experiments under controlled conditions and gather data that they then use to evaluate their hypotheses.  

So that's just a little taste of this already vast and growing subject. Welcome aboard!