The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (i) non-standard preferences; (ii) non-standard beliefs; and (iii) non-standard decision-making. In this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from giving to labor supply. In the class of non-standard preferences, I discuss time preferences (self-control problems), risk preferences (reference dependence), and social preferences. On non-standard beliefs, I present evidence on overconfidence, on the law of small numbers, and on projection bias. Regarding non-standard decision-making, I cover limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors -- firms, employers, CEOs, investors, and politicians -- respond to the non-standard behavior described in the survey. I then summarize five common empirical methodologies used in Psychology and Economics. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the non-standard features.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13420.
Length: Date of creation: Sep 2007 Date of revision: Handle: RePEc:nbr:nberwo:13420
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Find related papers by JEL classification: A1 - General Economics and Teaching - - General Economics C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments D00 - Microeconomics - - General - - - General D64 - Microeconomics - - Welfare Economics - - - Altruism D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving G1 - Financial Economics - - General Financial Markets M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising
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