Psychology and Economics: Evidence from the Field

TLDR

Behavioral economics demonstrates that individuals deviate from standard models in nonstandard preferences, beliefs, and decision making. This paper surveys empirical evidence from the field on these three classes of deviations. The survey examines applications ranging from consumption to finance, crime to voting, charitable giving to labor supply, covering time, risk, and social preferences, overconfidence, the law of small numbers, projection bias, framing, limited attention, menu effects, persuasion, social pressure, emotions, and how rational actors respond, while noting conditions that limit the impact of nonstandard behavior.

Abstract

The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (1) nonstandard preferences, (2) nonstandard beliefs, and (3) nonstandard 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 charitable giving to labor supply. In the class of nonstandard preferences, I discuss time preferences (self-control problems), risk preferences (reference dependence), and social preferences. On nonstandard beliefs, I present evidence on overconfidence, on the law of small numbers, and on projection bias. Regarding nonstandard decision making, I cover framing, 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 nonstandard behavior described in the survey. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the nonstandard features.