Behavioral Economics Policy Impact and Future Directions (2023) / Chapter Skim
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2 Development of Behavioral Economics
2 Development of Behavioral Economics
Pages 17-42
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From page 17... ...
The development of behavioral economics as a distinct field is just one of many important developments in economics in recent decades. Rapid gains in computing power and the availability of new kinds of data, along with new methodologies for analyzing data, have contributed to important advances in most social science fields, and economics is no exception.1 Economists have also increasingly extended the application of their methods beyond traditional areas, such as the analysis of financial markets, to support the development of public policies to address a wide range of issues, including environmental protection, public education, and poverty.
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From page 18... ...
However, these models assume that people behave with a certain level of rational ity, and it is there that behavioral economists have diverged, arguing that actual human behavior does not demonstrate this degree of consistency. Behavioral economists, thus, attempt to enrich traditional economic models by incorporat ing additional behavioral insights, derived primarily from research in psychology.
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From page 19... ...
Prospect theory assumes that the reference point is the default choice -- the one that would seem easiest or most obvious -- but reference dependence can refer to any situation where a decision is weighed against a hypothetical alternative choice. The framing of alternative decisions (the way they appear to the decision maker)
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From page 20... ...
Early examples focused on patterns of behavior in individual decision making under uncertainty and over time, and the ways in which the framing of the available options affects decisions. A later wave of research focused on field data and extended the work on behavioral biases to two main areas: the study of financial markets (by scholars such as Richard Thaler, Robert Shiller, and Andrei Shleifer; see, e.g., Thaler, 1993)
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From page 21... ...
. What distinguished these scholars was their interest in how individual behavior produced outcomes in specific institutional contexts.7 Experimental economists examining the behavior of individuals and groups in controlled conditions were confronted by the complexity of human motivation in the course of their attempts to test formal game theory in laboratory experiments.
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From page 22... ...
. Behavioral economics has achieved considerable success and influence in economics; the awarding of two Nobel Memorial Prizes for behavioral economics research and experimental economics highlighted the field's growing influence.10 By taking the utility-maximizing model typically used by traditional economists as a baseline and building related models that incorporate behavioral elements, and by adopting state-of-the-art empirical methods to obtain field evidence (such as natural experiments and randomized controlled trials)
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From page 23... ...
Research in cognitive psychology and neuroscience has shown that human decision making is influenced by fundamental cognitive processes, such as perception, attention, and memory, and their significant limitations. Research in social psychology and sociology has also contributed to understanding that decisions are highly contextual, shaped by multiple aspects of the circumstances in which a decision is made and past experiences that affect how each individual construes the world.
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From page 24... ...
how they respond to information. The word bias has a negative connotation in some contexts, but humans naturally take into account past knowledge and experience when processing new information; in the context of cognitive science, the word refers to the fact that the brain necessarily filters information (National Academies of Sciences, Engineering, and Medicine [National Academies]
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From page 25... ...
A decision maker may prioritize processing of information that is of highest relevance to particular goals, such as gaining the most reward in the least amount of time. For example, one study has shown that visual fixations and choices in simple choice tasks approximate an optimal information sampling policy to maximize rewards and minimize costs when taking account of environmental constraints (Callaway, Rangel, & Griffiths, 2021)
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From page 26... ...
This specification provides a formalized way of understanding how preference is constructed during deliberation. This modeling approach has been used as a descriptive theory of human behavior, as well as a theory for studying the optimal ity of human decision making because of its relationship to Bayesian inference (Bogacz et al., 2006)
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From page 27... ...
This brief overview of the role of perception, attention, and memory in decision making cannot do justice to the sophistication of ongoing work in psychology, neuroscience, and neuroeconomics, but the research highlighted here is especially relevant for understanding of decision making; see Box 2-2 for a discussion of modeling approaches. The Relevance of Context Social psychologists and sociologists have explored the concentric rings of influence on how people think, learn, behave, and feel about their world, from family and friends, to school and work environments, to geographical location, and outward to the sociopolitical context.
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From page 28... ...
any time an individual makes a decision, cognitive processes are influenced not only by the cognitive biases discussed above, but also by factors that reflect cultural and other influences from the decision maker's environment; and (2) the specific context in which the decision is made may have a strong influence on the decision maker's choices.
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From page 29... ...
. Evoked identities are those that are brought to the forefront of a person's thoughts and behavior by a specific context or situation, and these identities often have associated tastes, values, and priorities that can shape decision making.
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From page 30... ...
Traditional economic models generally portray individual decision making as a function of probabilities -- the likelihood that different future states of the world will occur if they take different actions. Those probabilities are typically assumed to arise from rational evaluations of past events (learning)
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From page 31... ...
As this sampling of the large landscape of work on human cognition and behavior suggests, there is a firm empirical base of understanding about the ways humans process and act on information that can be integrated into the work of behavioral economists. Conclusion 2-1: There is strong evidence that people's decision making is affected by two factors: • perception bias, attention bias, and memory bias all signifi cantly influence the way people understand available options and make decisions about them; and • complex aspects of the specific context can influence people's perceptions and the decisions they make.
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From page 32... ...
While only a few colleges and universities taught behavioral economics, experimental economics, or behavioral game theory in the 1980s and 1990s, most major universities now offer such coursework. Behavioral economics approaches have also gained popularity as a tool for policy makers, and the consultants who advise them, to use in designing policies that take account of what is known about human cognition and behavior.
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From page 33... ...
We kept them in mind as we reviewed the literature and developed our recommendations. We note here the responses behavioral economists have offered to several frequently raised concerns: • behaviorally based interventions may in some cases reflect an un examined paternalistic attitude toward the targets of behaviorally based interventions; • many behavioral economics studies showing positive effects have comparatively small effect sizes; • interventions that focus on individual-level behavioral change may distract from or undermine policy attention to the need for system level change; • behavioral insights may be exploited by nongovernmental private agents, such as in the realms of political influencing and commer cial marketing; • behavioral interventions may have the unintended negative conse quence of exacerbating disparities in society; and • the representativeness in the samples used in behavioral economics research is often lacking.
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From page 34... ...
For example, many of the goals that behavioral economists target for interventions, such as high application rates to college, higher take-up of medicines, or higher retirement savings, are broadly supported and generally not controversial. Behavioral economists have suggested that paternalistic actions to improve these outcomes would have a high rate of social approval.
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From page 35... ...
Behavioral economists argue that those policies are more likely to achieve their aims if the behavioral responses of the people targeted are taken into account in the design of the policy. Behavioral scientists argue that most government regulatory efforts to reduce suboptimal behaviors (consumption of sugary cereals, for example)
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From page 36... ...
Some behavioral economists argue that these critiques are refuted in part by the large body of evidence on interventions designed explicitly to close equity gaps (such as unequal distributions of government benefits) and that many behavioral policies are directed to assist disadvantaged groups, at least in the United States (e.g., behavioral redesigns of financial aid forms for low-income college students [see Chapter 9]
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From page 37... ...
. The influence of randomized controlled trials on development economics research and on development policy.
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From page 38... ...
. Behavioral game theory: Experiments in strategic interaction.
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From page 39... ...
The American Economic Review, 69(4)
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From page 40... ...
Organizational Behavior and Human Decision Processes, 111(1)
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From page 41... ...
. Dark nudges and sludge in big alcohol: Behavioral economics, cognitive biases, and alcohol industry corporate social responsibility.
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From page 42... ...
American Economic Review, 93(3)
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