Behavioral economics: past, present and future
Date
2019
Authors
Baddeley, M.
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Book chapter
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Source details - Title: Towards and new enlightenment? A transcendent decade, 2019, pp.1-17
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Abstract
Today, it seems as though everyone is talking about behavioral economics. Governments are embedding behavioral insights into policy. Commercial businesses are using it to inform their marketing strategies. Lessons from behavioral economics are informing relationships between employers and employees. Even in the silos of academia, most applied research teams—most obviously other social scientists but also natural scientists, from neuroscientists through to behavioral ecologists, computer scientists and engineers—are keen to bring behavioral economists into the multidisciplinary teams so that they can connect their research with insights from behavioral economics. Why? Because behavioral economics combines a unique collection of insights from social science. It brings together economists’ powerful analytical tools, traditionally applied in a restricted way to unraveling the economic incentives and motivations driving us all. But it also addresses the fundamental flaw in non-behavioral economics: its highly restrictive conception of rationality, based on assumptions of agents able easily to apply mathematical tools in identifying the best solutions for themselves or their businesses.
Herbert Simon made some early progress in re-conceptualizing rationality in economics—via his concept of “bounded rationality”, that is, rationality bounded by constraints in information available or in cognitive processing ability (Simon, 1955). Modern behavioral economists have taken this further by bringing together rich insights from psychology to capture how economic incentives and motivations are changed, often fundamentally, by psychological influences. Neither the economics nor the psychology can stand alone. Without economics, the psychology lacks analytical structure and direction—especially in describing everyday decision-making. Without the psychology, economics lacks external consistency and intuitive appeal. Together, the subjects are uniquely insightful. Together, they enable us powerfully to understand what and how real people think,choose, and decide in ways that no single academic discipline has managed before—generating not only new theoretical insights but also new practical and policy insights that, at best, have the power to change livelihoods, prosperity, and well-being across a range of dimensions.