What is behavioral economics?



This seems like a really complicated subject that needs a good, simple definition. It would be helpful to know how it relates to traditional economics and what behavioral economists are saying about how the economy is doing today.

In: Economics

Behavioral economics are basically applied game theory and psychology. The discipline tries to model economic processes based on the perspective of all the individual actors and their likely – but often illogical or non-optimal – actions.

Behaviorism rehashed. It’s an empirical approach to understanding human behavior, which was pioneered by B. F. Skinner but too far ahead of his own time to be appreciated. Although, instead of demonstrating relationships between behavior and environmental factors, behavioral economics seeks to establish economic theories that explain all human behavior as extrapolated from a few experiments/observations, and always toward a technology of behavioral manipulation and control, such as nudges (which were called prompts or discriminative stimuli by Skinner).

My recommendation: if you want to know about behavioral economics, forget about behavioral economics and study Skinner instead.

Economics is, at its core, about studying how people make decisions. Traditional economics assumes that people are rational when they make decisions. They weigh the pros and cons of each option and make the choice that is best for them. Traditional economics allows people to vary a lot in their preferences – each person could have a different “best” choice – but assumes that people always approach the problem rationally.

Behavioral economics posits that decisions are not so rational. A classic example is “opt-out” vs “opt-in”. Consider sending an organ donor registration form to a group of people. In one version of the form, the respondents must check a box saying “I want to be an organ donor” – they have to opt into the program. In the other version, they must check a box saying “I don’t want to be an organ donor” they have to opt out of the program. Behavioral economists have found that a significant number of people will refuse to opt-in to programs, but they will also fail to opt-out. That is, just the way the request is phrased changes their decision. This isn’t really consistent with a model where each person is either optimally an organ donor or not and consistently expresses that preference.

Ultimately, behavioral economics isn’t so much a repudiation of traditional economics as an extension of it. There are still rational explanations for why opt-out vs opt-in (for example) might matter. Maybe these things signal what society or an authority figure has already decided is best, and some respondents trust that decision or don’t want to rock the boat. Maybe people just don’t think it’s worth it to pay attention to the form. What behavioral economics really does is emphasize that “rational” decisionmaking is sometimes shaped much more by psychological or social quirks than by dispassionate calculations.