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This book sets the agenda to turn behavioral economics, which has long been considered a subordinate discipline, into mainstream economics. Ghisellini and Chang expose the conceptual and empirical inadequacy of conventional economics using illustrations of real world decision-making in a dynamic environment, including evidence from the global financial crisis. With a rigorous yet accessible style, they give a comprehensive overview of behavioral economics and of the current state of play in the field across different schools of thought. Seven major conceptual problems still affecting the development of behavioral economics are identified and the authors propose research avenues to address these issues and allow the discipline to receive its long-awaited recognition.
In the last decade, behavioral economics, borrowing from psychology and sociology to explain decisions inconsistent with traditional economics, has revolutionized the way economists view the world. But despite this general success, behavioral thinking has fundamentally transformed only one field of applied economics-finance. Peter Diamond and Hannu Vartiainen's Behavioral Economics and Its Applications argues that behavioral economics can have a similar impact in other fields of economics. In this volume, some of the world's leading thinkers in behavioral economics and general economic theory make the case for a much greater use of behavioral ideas in six fields where these ideas have already proved useful but have not yet been fully incorporated--public economics, development, law and economics, health, wage determination, and organizational economics. The result is an attempt to set the agenda of an important development in economics--an agenda that will interest policymakers, sociologists, and psychologists as well as economists. Contributors include Ian Ayres, B. Douglas Bernheim, Truman F. Bewley, Colin F. Camerer, Anne Case, Michael D. Cohen, Peter Diamond, Christoph Engel, Richard G. Frank, Jacob Glazer, Seppo Honkapohja, Christine Jolls, Botond Koszegi, Ulrike Malmendier, Sendhil Mullainathan, Antonio Rangel, Emmanuel Saez, Eldar Shafir, Sir Nicholas Stern, Jean Tirole, Hannu Vartiainen, and Timothy D. Wilson.
We discuss the literatures on behavioral economics, bounded rationality and experimental economics as they apply to firm behaviour in markets. Topics discussed include the impact of imitative and satisficing behavior by firms, outcomes when managers care about their position relative to peers, the benefits of employing managers whose objective diverges from profit-maximization (including managers who are overconfident or base pricing decisions on sunk costs), the impact of social preferences on the ability to collude, and the incentive for profit-maximizing firms to mimic irrational behavior.
Around the world, but especially in America, consumers are eating more energy in meals away from the home than in the past years. Restaurant meals have become larger, and we eat more of them.1,2 With increased energy consumption closely associated with the rise in obesity,3 many authors have suggested portion control as an important means to reduce the trend.4 In the current paper, I will use frameworks and evidence from marketing and behavioral economics to highlight the opportunities and barriers for portion control in food service environments. The opportunities and barriers will be considered from the perspective of both the customer and the food service operator.
For all of the opportunities listed here, there is evidence from marketing and behavioral economics that they could increase the likelihood that consumers will choose smaller portions. At the same time, there are revenue and cost barriers to each of them. It is beyond the scope of this paper to quantify these revenues and costs (see Dittmer and Keefe9 for a detailed treatment), but I will offer suggestions as to which of the barriers are likely to be the biggest, and in which situations.
By asking questions like these and identifying answers through experiments, the field of behavioral economics considers people as human beings who are subject to emotion and impulsivity, and who are influenced by their environments and circumstances.
Several principles have emerged from behavioral economics research that have helped economists better understand human economic behavior. From these principles, governments and businesses have developed policy frameworks to encourage people to make particular choices.
This classic example demonstrates that people are more willing to take a greater statistical risk if it means avoiding a $1,000 loss versus obtaining a $1,000 win, which contradicts expected utility theory. Prospect theory and other work by Tversky and Kahneman continues to inform many areas of behavioral economics research today.
In the 1980s, Richard Thaler began to build on the work of Tversky and Kahneman, with whom he collaborated extensively. Now the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the Booth School of Business, he is today considered a founder of the field of behavioral economics.
Labor market policies succeed or fail at least in part depending on how well they reflect or account for behavioral responses. Insights from behavioral economics, which allow for realistic deviations from standard economic assumptions about behavior, have consequences for the design and functioning of labor market policies. We review key implications of behavioral economics related to procrastination, difficulties in dealing with complexity, and potentially biased labor market expectations for the design of selected labor market policies including unemployment compensation, employment services and job search assistance, and job training.
In these notes, we briefly review selected topics in labor market policy through the lens of behavioral economics. We identify aspects of U.S. policy design that appear at odds with behavioral findings, as well as unrealized policy opportunities those findings suggest. The results of this review are prescriptions for policy design and innovation that reflect a synthesis of traditional and behavioral economic insights. We consider the implications of behavioral findings in three areas: unemployment insurance, job search assistance, and job training. Although we focus on the specifics of U.S. labor market policies, the lessons we draw potentially have broader applicability.
In addition, there are behavioral barriers to job search that arise simply due to the fact that it is an intrinsically difficult problem. Optimal job search requires considering information about job market conditions and how they match with personal characteristics in a way that is likely to be difficult for imperfectly rational individuals. Behavioral economics stresses that individuals are limited in the attention and the computational capacity they can bring to multifaceted and complex problems (Tversky and Shafir [1992]; Tversky and Kahneman [1974]; Iyengar and Lepper [2000]). As a result, the speed and quality of employment matches may both suffer due to the tendency of fallible individuals to manage the complex tasks of job search. And programs that assist individuals with managing that complexity can help them obtain work.
Employment services and job search assistance face behavioral barriers to their effectiveness beyond the difficulties individuals may have with the complexity or the willpower requirements of job search. Most prominently, the systematic biases or reference dependence related to previous earnings that unemployed individuals may exhibit with respect to wage expectations can remain an impediment to seeking and accepting work. Job search assistance can potentially work to address the biases, frames, or other cognitive obstacles to employment because it represents an opportunity for policy to influence how individuals understand the possibilities before them in the job market. Behavioral economics suggests that the way in which job opportunities are framed can matter for how individuals respond to choices. This suggests a research agenda to experiment with modifications to the presentation of job search information beyond simplification. Policymakers can innovate in the way that employment services are presented to individuals.
A review of the intersection of behavioral economics and current U.S. labor market policies suggest specific policy reforms and motivates demonstration and evaluation projects in areas where greater knowledge is needed. We have noted potential reforms and promising research projects in the domains of unemployment compensation, job search assistance, and job training. Although these are only a few selected applications, they demonstrate the promise of a behavioral approach to labor market policy. Realizing this promise more fully is an important goal for future research.
Stephan Meier is currently the chair of the Management Division and the James P. Gorman Professor of Business at Columbia Business School. He holds a PhD in Economics from the University of Zurich, was previously a senior economist at the Center for Behavioral Economics and Decision-Making at the Federal Reserve Bank of Boston and taught courses on strategic interactions and economic policy at Harvard University and the University of Zurich. His research interest is in behavioral strategy. He investigates the impact of psychology and economics on human decision-making and its implications for public policy and firms' strategy. Current research topics include how non-selfish behavior affect organizations or the effect of borrower's decision-making on financial institutions' strategy. His work has been published in the leading academic journals including the American Economic Review and Management Science, and has been profiled by the press such as The Economist, Wall Street Journal, Financial Times, New York Times, Los Angeles Times, and Neue Zuercher Zeitung. 2b1af7f3a8
