Behavioral Economics and Its Applications by Peter Diamond, Hannu Vartiainen

By Peter Diamond, Hannu Vartiainen

In the decade, behavioral economics, borrowing from psychology and sociology to provide an explanation for judgements inconsistent with conventional economics, has revolutionized the best way economists view the area. yet regardless of this common good fortune, behavioral considering has essentially remodeled just one box of utilized economics-finance. Peter Diamond and Hannu Vartiainen's Behavioral Economics and Its Applications argues that behavioral economics may have the same impression in different fields of economics.

during this quantity, a number of the world's best thinkers in behavioral economics and normal fiscal concept make the case for a far larger use of behavioral rules in six fields the place those principles have already proved helpful yet haven't but been absolutely incorporated--public economics, improvement, legislations and economics, health and wellbeing, salary selection, and organizational economics. the result's an try to set the time table of an immense improvement in economics--an time table that might curiosity policymakers, sociologists, and psychologists in addition to economists.

members comprise 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.

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Example text

In these situations, denying the possibility of mistakes while rigidly adhering to the principle of revealed preference guarantees the use of an improper welfare criterion. So far, we have confined our discussion to “dysfunctional” choices. More generally, almost any behavioral anomaly motivating some relaxation of the first three assumptions can also motivate relaxation of the fourth. ” Likewise, people may make precommitments to prevent themselves from repeating a pattern of mistakes. A natural analytic strategy involves endowing the individual with well-behaved lifetime preferences, while simultaneously specifying a decision process (or decision criterion) that does not necessarily involve selecting the maximal element in the preference ordering.

6 Models of Savings with Cue-Triggered Mistakes Bernheim and Rangel (2005b) propose an alternative model of savings in which individuals make stochastic mistakes. As in the standard model, true preferences 9 Feldstein does not use the (β, δ)-language, but his model is a special case of this framework.

The direct evidence for this proposition is experimental. The typical experiment involves two treatments. In the first, subjects are offered a small prize in s days, or a large prize in t days. In the second, they are offered the same small prize in s + d days, or the same large prize in t + d days, for some d > 0 (where we interpret d as “delay”). When s = 0 (that is, the subject decides between an immediate reward and a delayed one in the first treatment), a significantly larger fraction of subjects choose the small prize in the first treatment than in the second (see, for example, Ainslie and Haendel (1983), or, for a recent review of the evidence, Frederick et al.

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