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An Approach to Incorporating Psychology into Economics


  • Matthew Rabin


This article proposes an approach to improving the psychological realism of economics while maintaining its conventional techniques and goals--formal theoretical and empirical analysis using tractable models, with a focus on prediction and estimation. Besides tolerating the imperfections that come with precision, models should aim for two crucial criteria: power and scope. The approach advocated is to develop portable extensions of existing models that embed preexisting theories as parameter values, while introducing the new psychological assumptions as alternative parameter values, and make the model portable by defining it in all cases where existing models make predictions.

Suggested Citation

  • Matthew Rabin, 2013. "An Approach to Incorporating Psychology into Economics," American Economic Review, American Economic Association, vol. 103(3), pages 617-622, May.
  • Handle: RePEc:aea:aecrev:v:103:y:2013:i:3:p:617-22 Note: DOI: 10.1257/aer.103.3.617

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    References listed on IDEAS

    1. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    2. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
    3. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
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    Cited by:

    1. Börsch-Supan, A. & Härtl, K. & Leite, D.N., 2016. "Social Security and Public Insurance," Handbook of the Economics of Population Aging, Elsevier.
    2. Wälde, Klaus & Moors, Agnes, 2016. "Current Emotion Research in Economics," IZA Discussion Papers 10261, Institute for the Study of Labor (IZA).
    3. Matthew Rabin, 2013. "Incorporating Limited Rationality into Economics," Journal of Economic Literature, American Economic Association, vol. 51(2), pages 528-543, June.
    4. Spiegler, Ran, 2017. "Behavioral Economics and the Atheoretical Style," CEPR Discussion Papers 11786, C.E.P.R. Discussion Papers.
    5. Erik Eyster & Matthew Rabin & Dimitri Vayanos, 2015. "Financial Markets where Traders Neglect the Informational Content of Prices," NBER Working Papers 21224, National Bureau of Economic Research, Inc.
    6. Ioannou, Christos A. & Romero, Julian, 2014. "A generalized approach to belief learning in repeated games," Games and Economic Behavior, Elsevier, vol. 87(C), pages 178-203.
    7. Pedro Bordalo & Nicola Gennaioli & Rafael La Porta & Andrei Shleifer, 2017. "Diagnostic Expectations and Stock Returns," NBER Working Papers 23863, National Bureau of Economic Research, Inc.
    8. Francesco Busato & Francesco Giuli, 2014. "Tax evasion and Prospect Theory in a OLG economy," Departmental Working Papers of Economics - University 'Roma Tre' 0196, Department of Economics - University Roma Tre.
    9. repec:eee:jeborg:v:137:y:2017:i:c:p:232-258 is not listed on IDEAS
    10. Jan Hausfeld & Sven Resnjanskij, 2017. "Risky Decisions and the Opportunity Costs of Time," TWI Research Paper Series 108, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    11. Giuseppe Ciccarone & Francesco Giuli, 2013. "Imperfect rationality, macroeconomic equilibrium and price rigidities," Departmental Working Papers of Economics - University 'Roma Tre' 0183, Department of Economics - University Roma Tre.
    12. Richard H. Thaler, 2016. "Behavioral Economics: Past, Present, and Future," American Economic Review, American Economic Association, vol. 106(7), pages 1577-1600, July.

    More about this item

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles


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