A Practicum in Behavioral Economics A (Very) Brief History fo the Origin of Behavioral Economciis

A ( VERY ) BRIEF HISTORY OF THE ORIGIN OF BEHAVIORAL ECONOMICS Most historical accounts trace the origin of behavioral economics as far back as Adam Smiths The Theory of Moral Sentiments , published in 1759 ( 1999 and , 2004 and , 2012 Thaler , 2016 ) As and ( 2004 ) point out , Smith was the first to propose that we humans derive more disutility ( The Theory Sentiments was Smith book . He is best known for The Wealth , published roughly 15 years later in 1776 , where he coined the now famous term invisible hand . Other important works commenting on the psychological underpinnings and of bedrock concept of early century neoclassical An Introduction to the Principles and Legislation ( 1789 ) and Theory Psychics ( 1881 ) and , 2004 ) 2006 ) traces the origin of behavioral economics back further to the gambling problems proposed by French gambler Chevalier de in 1654 . Perhaps the most famous gambling problem , the Petersburg paradox , was coined by Daniel in 1738 in his Commentaries of the Imperial Academy of Science of Saint Petersburg . solution to this gambling maximization of expected upon the assumption of diminishing marginal utility of wealth ( 2006 ) BEHAVIORAL ECONOMICS

unhappiness ) from losses than we do utility ( happiness ) from gains , a conjecture of loss aversion that later formed the basis of and ( 1979 ) Prospect Theory . And so , in the century , just as economics began to be considered a separate discipline , it appeared as though economic thought would necessarily evolve in tandem with our understanding of human psychology . However , by the turn of the century and the onset of the neoclassical revolution , economists began turning away from what was considered to be the inherently unscientific nature of psychological analysis , ultimately leading to the positivistic theories of human choice behavior posited by the likes of , Hicks , and ( to name but a few ) and later the normative and descriptive models of expected and discounted utility proposed by von , Morgenstern , and Because of the strong assumptions underpinning the expected utility and discounted utility models ( the Independence Axiom and exponential discounting , respectively ) critics such as , and were , by the middle of the century , had . As and ( 2004 ) point out , economists such as Irving Fisher and still stressed the role of psychology in choice behavior in the early part of the century . In the latter part of the century , economists George , Harvey , and Herbert of what is affectionately known as old behavioral economics stressed the role of psychology and bounded rationality as constraints on choices ( and , 2012 ) As ( 2006 ) points out , economics and psychology ultimately go separate ways , the former employing distinction , the latter using Savage distinction . ARTHUR

anomalous implications associated with these models . These implications would later be demonstrated in the famous laboratory experiments of , and Thaler ( and , 2004 ) At around the same time as and were running their experiments , developments in the field of cognitive as behavioral decision research promising new directions for explaining choice behavior as a consequence of the brains As described in and ( 2012 ) this parallelism between advancements in cognitive psychology and economic experimentation , along with the fact that cognitive science as a separate field of inquiry arose in opposition to the field of in psychology , suggests that the label behavioral economics is arguably a misnomer . Perhaps it would be more accurate to dub the field cognitive . See and Dawes ( 2001 ) for a nice discussion of behavioral decision research . 2011 ) provides an accessible account of how our brains capability drives the misconceptions and miscalculations that ultimately lead to the fallible and biases that he , and Thaler ( among others ) have both documented in their experiments and subsequently used as grist for their alternative theories of choice behavior . These theories , explored in Section of this book , are in turn the mainstay of behavioral economics . BEHAVIORAL ECONOMICS PRACTICUM