IDEAS home Printed from
   My bibliography  Save this paper

Introduction: Behavioral economics, business decision making and applied policy analysis


  • Berg, Nathan


The emergence of behavioural economics has provided new insights into economic and business phenomena by integrating elements of economic theory and experimental psychology. So far, the behavioural economics research agenda has concentrated on the empirical validity of foundational assumptions, producing new descriptive accounts of behavioural patterns that are difficult to explain using traditional neoclassical assumptions. This agenda has now developed sufficiently to begin exploring how to apply these descriptive findings to improve human performance, business decision making and economic policy. Forging a new normative economics based on behavioural theory is an ambitious project. There is not yet consensus, among behavioural economists or otherwise, that standard normative theories in economics such as the Fundamental Welfare Theorems built on axiomatic assumptions of self-interest, self-consistent utility maximisation and perfect information are in need of revision. From the observation that individual behaviour systematically deviates from textbook prescriptions for rational decision making, a broad range of sometimes conflicting conclusions about normative economics can be drawn. For example, some argue that when behaviour deviates from textbook prescriptions, policy should seek to revise people’s behaviour rather than economists revise their normative models, e.g., teaching MBA students to correctly apply Bayes Rule rather than abandoning Bayes Rule as a criterion for rational decision making. Others argue that, because individuals fail to meet the idealised standard of perfect economic rationality, behavioural theory provides a new rationale for paternalistic intervention aiming to ‘de-bias’ individual behaviour, e.g., taxing potato chips and subsidising carrots to correct for impulsive consumer decisions at the grocery store. Still others argue that normative benchmarks such as transitivity, expected utility axioms, set-theoretic logic and probability theory, are largely irrelevant criteria for deciding whether a particular decision process works well in its respective environment. There is another possibility, infrequently mentioned: that economists abandon the singular normative framework based on axiomatic rationality in favor of empirical studies of behavior that is successful by a well defined criterion in a particular context--the concept of matching behavior to environment referred to as ecological rationality. Rather than achieving a unified consensus, there clearly are multiple approaches with different priorities for bringing the descriptive findings of behavioural economics’ early years to bear on normative economics. Behavioural economics’ goal of improved empirical realism will necessitate more attention among researchers to the problem of connecting theory to applied problems and contemporary debates in business, economics and political economy.

Suggested Citation

  • Berg, Nathan, 2007. "Introduction: Behavioral economics, business decision making and applied policy analysis," MPRA Paper 26369, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:26369

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    1. Ball, Clifford A. & Torous, Walter N., 2000. "Stochastic correlation across international stock markets," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 373-388, November.
    2. Robert J. Shiller & Karl E. Case & Allan N. Weiss, 1995. "Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate," Cowles Foundation Discussion Papers 1098, Cowles Foundation for Research in Economics, Yale University.
    3. Robert J. Shiller, 1991. "Arithmetic Repeat Sales Price Estimators," Cowles Foundation Discussion Papers 971, Cowles Foundation for Research in Economics, Yale University.
    4. Christofi, A. & Pericli, A., 1999. "Correlation in price changes and volatility of major Latin American stock markets," Journal of Multinational Financial Management, Elsevier, vol. 9(1), pages 79-93, January.
    5. John Okunev & Patrick J. Wilson, 1997. "Using Nonlinear Tests to Examine Integration Between Real Estate and Stock Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 487-503.
    6. Goetzmann, William Nelson, 1993. "The Single Family Home in the Investment Portfolio," The Journal of Real Estate Finance and Economics, Springer, vol. 6(3), pages 201-222, May.
    7. Joseph Gyourko & Donald B. Keim, 1992. "What Does the Stock Market Tell Us About Real Estate Returns?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(3), pages 457-485.
    8. Nathan Berg, 2003. "Hedging housing risk in the new economy: is there a connection, and should firms care?," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 5(1), pages 10-36.
    9. Tse, Y. K., 2000. "A test for constant correlations in a multivariate GARCH model," Journal of Econometrics, Elsevier, vol. 98(1), pages 107-127, September.
    10. Ball, Clifford A. & Torous, Walter N., 2000. "Stochastic Correlation Across International Stock Markets," University of California at Los Angeles, Anderson Graduate School of Management qt6vn9q79w, Anderson Graduate School of Management, UCLA.
    11. Joseph Gyourko & Donald B. Keim, "undated". "What Does the Stock Market Tell Us About Real Estate Returns? (Revision of 18-91) (Reprint 030)," Rodney L. White Center for Financial Research Working Papers 11-92, Wharton School Rodney L. White Center for Financial Research.
    12. Engle, Robert F, 2000. "Dynamic Conditional Correlation - A Simple Class of Multivariate GARCH Models," University of California at San Diego, Economics Working Paper Series qt56j4143f, Department of Economics, UC San Diego.
    13. Kari Takala & Pekka Pere, 1991. "Testing the cointegration of house and stock prices in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 4(1), pages 33-51, Spring.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Normative Economics; Behavioral Economics; Policy; Bounded Rationality; Ecological Rationality; As-If; Methodology; Choice Under Uncertainty; Procedural Rationality;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:26369. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.