Behavioral Economics PDF
Preview Behavioral Economics
Behavioral Economics Over the last few decades behavioral economics has revolutionized economics. It has done so by putting the human back into economics, by recognizing that people sometimes make mistakes, care about others, and are generally not as cold and calculating as economists have traditionally liked to think they are. The results have been exciting, fascinating, and have fundamentally changed the way we look at economic behavior. This book will show you why. A ll the main results and insights of behavioral economics are introduced at an intuitive level, with important ideas like mental accounting, prospect theory, present bias, inequality aversion, and learning explained in detail. These insights are also applied in diverse settings to show you why behavioral economics is crucial to understanding the world around us. The book covers auctions, stock market crashes, giving to charity, health care, saving for retirement, the gender gap, addiction, and much more. T he intriguing new subject of neuroeconomics is covered in depth, as is the role that evolution and culture may have played in shaping modern economic behavior. Consideration is also given to what makes people happy, and how we can poten- tially nudge them to be happier. This makes for an accessible and comprehensive text that will be of great value to the students who use it. Edward Cartwright is Lecturer in Economics at the University of Kent at Canterbury, United Kingdom. Routledge advanced texts in economics and fi nance 1. Financial econometrics 9. Information economics Peijie Wang Urs Birchler and Monika Bütler 2. Macroeconomics for developing 10. Financial econometrics countries (2nd edition) (2nd edition) Raghbendra Jha Peijie Wang 3. Advanced mathematical 11. Development fi nance economics Debates, dogmas and new Rakesh Vohra directions Stephen Spratt 4. Advanced econometric theory John S. Chipman 12. Culture and economics On values, economics and 5. Understanding macroeconomic international business theory Eelke de Jong John M. Barron, Bradley T. Ewing and Gerald J. Lynch 13. Modern public economics (2nd edition) 6. Regional economics Raghbendra Jha Roberta Capello 14. Introduction to estimating 7. Mathematical fi nance core economic models theory, problems and statistical Atsushi Maki algorithms Nikolai Dokuchaev 15. Advanced econometric theory John Chipman 8. Applied health economics Andrew M. Jones, Nigel Rice, 16. Behavioral economics Teresa Bago d’Uva and Edward Cartwright Silvia Balia Behavioral Economics Edward Cartwright First published 2011 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business This edition published in the Taylor & Francis e-Library, 2011. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. © 2011 Edward Cartwright The right of Edward Cartwright to be identifi ed as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice : Product or corporate names may be trademarks or registered trademarks, and are used only for identifi cation and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record has been requested for this book ISBN 0-203-81686-2 Master e-book ISBN ISBN: 978-0-415-57309-2 (hbk) ISBN: 978-0-415-57312-2 (pbk) ISBN: 978-0-203-81686-8 (ebk) Dedicated to Kerry, Robert and Anna Contents Preface ix PART I Introduction 1 1 An introduction to behavioral economics 3 PART II Economic behavior 25 2 Simple heuristics for complex choices 27 3 Choice with risk 85 4 Choosing when to act 135 5 Learning from new information 169 6 Interacting with others 211 7 Social preferences 263 PART III Origins of behavior 309 8 Evolution and culture 311 9 Neuroeconomics 344 viii Contents PART IV Welfare and policy 391 10 Happiness and utility 393 11 Policy and behavior 432 Bibliography 457 Index 472 Preface T he origins of this book are four or fi ve years ago when I started teaching a course called S trategy and Games to fi rst year undergraduates. The idea of the course was to illustrate through classroom experiments some of the basic ideas of economics and game theory. In teaching that course my interest and knowledge of behavioral economics grew a lot; as did my frustration at the limited resources available to students wanting to learn more about this fascinating area of economics. Eventually, I decided it was time to write this book. My basic objective when writing the book was to convey both the excitement and the importance of behavioral economics. I wanted to explain the basic principles, ideas and results of behavioral economics and show how fascinating they are. I also wanted to illustrate through applications why behavioral economics is fundamentally important in understanding the world around us. I wanted a book that was accessible to a general reader, not just those trained in economics, and/or comfortable with algebra. You can be the judge of whether I achieved what I set out to do. I could not have written this book without those who have contributed to the literature on behavioral economics and given me such great material to work with. Particular thanks are due to those who made my job so easy by writing papers over many years that, when put together, gave very clear insights into economic behavior. I would love to thank these people publicly, but in writing their names it would probably be all too obvious which names I do not mention. I will, there- fore, reserve my thanks for now. I just hope to have done justice to the great work out there. I should also make clear that the opinions expressed in this book are mine, and not necessarily those of the researchers whose work I refer to. Any mistakes are mine as well. I can be a lot freer in the thanks for my wife Anna, who has helped so much in writing this book. On a personal level she has been patient and supportive while I wrote it. On a practical level, she is my greatest critic, never happy until every- thing is explained as fully and clearly as possible; she is also a great source of new ideas and new ways of thinking about old ideas. I should also thank all the students and colleagues connected with the Strategy and Games course, for teaching me so much. Finally, I want to give a big thanks to Myrna Wooders who, as well as being a fantastic person to know, has long been, and continues to be, a great inspiration and mentor.
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