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.