| Abstract: |
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. |