In these situations, behavior tends to be influenced by anticipatory feelings, emotions experienced in the moment of decision making. Availability and affect are processes internal to the individual that may lead to bias. The external equivalent of these processes is salience , whereby information that stands out, is novel, or seems relevant is more likely to affect our thinking and actions Dolan et al.
Salience also underlies heuristic judgments that rely on external cues. Some psychologists have derived effort-reducing heuristics that simplify consumer decision making. While many heuristics and biases are the result of quick impressions, the automatic character of System 1 is also reflected in a human aversion to change. One aspect in this respect is evident in the formation of habits , automatic behavioral patterns that are the result of repetition and associative learning Duhigg, In this case, an effective way to increase enrolment rates is to change the default —what happens when people do not make an active choice.
System 1 is dominated by gut feelings and a limits to information processing, which may lead people to be overly optimistic. People often overestimate the probability of positive events and underestimate the probability of negative events happening to them in the future Sharot, For example, we may underestimate our risk of getting cancer and overestimate our future success on the job market.
It is frequently measured by having experimental participants answer general knowledge test questions.
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They are then asked to rate how confident they are in their answers on a scale. A big range of issues have been attributed to overconfidence. Among investors, for example, overconfidence has been associated with excessive risk-taking e. Odean, and overtrading e. Another important domain of BE introduces a time dimension to human evaluations and preferences.
This area acknowledges that people are biased towards the present and poor predictors of future experiences, value perceptions, and behavior. Discounting is non-linear, and its rate is not constant over time. Although the gap is one month in both cases, the value of events that are farther in the future falls more slowly than those closer to the present Laibson, In addition to inertia, future discounting is another key problem that explains low retirement savings rates.
One piece of research suggests that behavioral change could be achieved by helping people connect with their future selves. In the study, people who saw an age-progressed avatar of themselves were more likely to accept future financial rewards over immediate ones Hershfield et al. When shopping for multiple future consumption episodes, I may choose the variety pack of cereal, only to realize two weeks later that I would have enjoyed my breakfasts more if I had just stuck to my favorite kind.
This inability to appreciate fully the effect of emotional and physiological states on decision making is known as the hot-cold empathy gap , a term coined by George Loewenstein, one of the founders of the field of behavioral economics. Hot states include a number of visceral factors, ranging from negative emotions associated with high levels of arousal e. When we make plans for the future, we are often too optimistic. For example, we are subject to committing the planning fallacy by underestimating how long it will take us to complete a task and ignoring past experience Kahneman, The level of happiness that I expect to feel during my next vacation, for example, is likely to be higher than how I will rate it during the actual experience.
There are different explanations for this error, including how we remember past events. Finally, as my vacation days go by, I will simply get used to it and my happiness will level out. Contrary to the homo economicus view of human motivation and decision making, BE does not assume that humans make choices in isolation, or to serve their own interest. Aside from cognitive and affective emotional dimensions, an important area of BE also considers social forces, in that decisions are made by individuals who are shaped by—and embedded in—social environments.
Trust , which is one of the explanations for discrepancies between actual behavior and that predicted by a model of self-interested actors, makes social life possible and permeates economic relationships. Although neoclassical economic theory suggests that trust in strangers is irrational, trust and trustworthiness can be widely observed across societies.
In fact, reciprocity discussed later exists as a basic element of human relationships and behavior, and this is accounted for in the trust extended to an anonymous counterpart Berg et al. Both trust and trustworthiness increase when individuals are closer socially, but the latter declines when partners come from different social groups, such as nationality or race. Furthermore, high status individuals are found to be able to elicit more trustworthiness in others Glaeser et al.
Trust has been investigated in experimental games. In trust games , participants are asked to split money between themselves and someone else. Player A is asked to determine an initial endowment of zero or a higher value e. The money is then multiplied e. The game is about reciprocity and trust, because Player A must decide how much of the endowment to give to Player B in the hope of receiving at least the same amount in return. In the original experiment Berg et al. This finding confounds the prediction offered by standard economic assumptions.
In human relationships, deception is often considered a violation of trust, while in standard economics, dishonesty can be seen as a natural by-product of actors with self-interested motives. However, the BE perspective does not consider humans to be more honest; rather, it takes a more social-psychological perspective by showing that dishonesty is not just about tradeoffs between external incentives such as material gain and costs such as punishments.
Dishonesty is the product of situations as well as both internal and external reward mechanisms, which often involves self-deception—the reframing of dishonest acts e. People typically value honesty, tend to have strong beliefs in their morality and want to maintain this aspect of their self-concept Mazar et al.
When moral reminders are used, however, this self-deception can be reduced, as demonstrated in laboratory experiments conducted by Mazar and colleagues. Behavioral research on individual decision making in social contexts often relies on experimental games. Along with behavioral decision theory, behavioral game theory is the second major theoretical area found in behavioral economics. Typically, these games endow participants with rewards e. This occurs over the course of one or more rounds of playing. The outcome of the game is evident in the way rewards are split between players, and the results often show that people have inequity aversion , i.
Reciprocity, however, can have positive and negative aspects. In the real world, charities sometimes use reciprocity to their advantage. Social norms are implicit or explicit behavioral expectations or rules within a society or group of people Dolan et al. Our preferences are not simply a matter of basic tastes; they are also influenced by norms, as manifested in gender roles, for example. Norms vary across cultures and contexts. For example, while market norms would dictate that payment is required for a good or service, social norms are quite different—would you offer to pay a family member for the meal that he has prepared for you Ariely, ?
Sometimes social norms of exchange such as reciprocity and market norms co-exist in the same sphere. For instance, while market exchange norms dictate that I will charge a client for a consulting job, I may also give that client free advice, on some occasions, in the hope that the favor will be reciprocated in the future. Along with informational feedback e. One study compared contribution levels for a public radio fundraiser in the US. When potential donors were provided with social information signaling norms e. Human susceptibility to feedback about social norms is related to our desire to maintain a positive view of who we are as a person.
When the outcome of an action threatens this desire, we may change our behavior, though we often simply change our attitudes or beliefs. Unlike the rational choice view of human decision making, where preferences guide choices, rationalization implies the opposite: Sometimes preferences can justify actions after the fact March, Cognitive dissonance theory is an illustration of the human need for a continuous and consistent self-image Cialdini, In an effort to align future behavior, being consistent is best achieved by making a commitment , especially if it is done publicly.
Thus, pre-committing to a goal is one of the most frequently applied behavioral devices to achieve positive change. The program gives employees the option of pre-committing to a gradual increase in their savings rate in the future, each time they get a raise. The program avoids the perception of loss that would be felt with a reduction in disposable income, because consumers commit to saving future increases in income.
The idea of herding has a long history in philosophy and crowd psychology. It is particularly relevant in the domain of finance, where it has been discussed in relation to the collective irrationality of investors, including stock market bubbles Banerjee, Economic or asset bubbles form when prices are driven much higher than their intrinsic value. Well-known examples of bubbles include the US Dot-com stock market bubble of the late s and housing bubble of the mids. According to Robert Shiller , who warned of both of these events, speculative bubbles are fueled by contagious investor enthusiasm see also herd behavior and stories that justify price increases.
Doubts about the real value of investment are overpowered by strong emotions, such as envy and excitement. Economic bubbles are usually followed a sudden and sharp decrease in prices, also known as a crash. Behavioral economics BE uses psychological experimentation to develop theories about human decision making and has identified a range of biases as a result of the way people think and feel. According to BE, people are not always self-interested, benefits maximizing, and costs minimizing individuals with stable preferences—our thinking is subject to insufficient knowledge, feedback, and processing capability, which often involves uncertainty and is affected by the context in which we make decisions.
Most of our choices are not the result of careful deliberation. We are influenced by readily available information in memory, automatically generated affect, and salient information in the environment. We also live in the moment, in that we tend to resist change, are poor predictors of future behavior, subject to distorted memory, and affected by physiological and emotional states.
Finally, we are social animals with social preferences, such as those expressed in trust, reciprocity and fairness; we are susceptible to social norms and a need for self-consistency. Ajzen, I. The theory of planned behavior. Organizational Behavior and Human Decision Processes, 50, Akerlof, G. Identity Economics. Allcott, H. Social norms and energy conservation. Journal of Public Economics, 95 5 , An, S. Antidepressant direct-to-consumer advertising and social perception of the prevalence of depression: Application of the availability heuristic.
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Impulsivity and cigarette smoking: Delay discounting in current, never, and ex-smokers. Psychopharmacology, 4 , Bikhchandi, S. A theory of fads, fashion, custom and cultural change as informational cascades. Journal of Political Economy, , Biswas, D. The effects of option framing on consumer choices: Making decisions in rational vs. Journal of Consumer Behaviour, 8, Bohnet, I. American Economic Review, 98, Branson, C. Acceptable behaviour: Public opinion on behaviour change policy. Buehler, R. Journal of Personality and Social Psychology, 67 3 , Camerer, C. Behavioral game theory.
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Nonconscious goals and consumer choice. Journal of Consumer Research, 35, The chameleon effect: The perception-behavior link and social interaction. Journal of Personality and Social Psychology, 76 6 , Cialdini, R. Influence: Science and Practice, 5th ed. Boston: Pearson. Personality and Social Psychology Bulletin, 25, Reciprocal concessions procedure for inducing compliance: The door-in-the-face technique. Journal of Personality and Social Psychology, 31, Communications and behavior change. Coulter, K. Size does matter: The effects of magnitude representation congruency on price perceptions and purchase likelihood.
Journal of Consumer Psychology, 15 1 , 64— Davenport, T. How to design smart business experiments. Harvard Business Review , 87 2 , Diclemente, C. The role of feedback in the process of health behavior change. American Journal of Health Behavior, 25, Dolan, P. London, UK: Cabinet Office. Duhigg, C. The power of habit: Why we do what we do in life and business. New York: Random House. Dunt, I. February 5, Nudge nudge, say no more.
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An experimentally validated preference module. The hidden costs of control. American Economic Review, 96, — Fehr, E. On the economics and biology of trust. Journal of the European Economic Association, 7, Fairness and retaliation: The economics of reciprocity. Journal of Economic Perspectives, 14, A theory of fairness, competition, and cooperation. The Quarterly Journal of Economics, , Festinger, L. A theory of cognitive dissonance. Stanford: Stanford University Press.
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Information avoidance. Journal of Economic Literature, 55 1 , Goodman, J. Data collection in a flat world: Strengths and weaknesses of Mechanical Turk samples. Journal of Behavioral Decision Making, 26 3 , Gouldner, A. The norm of reciprocity: A preliminary statement.
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American Sociological Review , 25 2 , Grinblatt, M. Sensation seeking, overconfidence, and trading activity. Journal of Finance, 64 2 , Guth, W. An experimental analysis of ultimatum bargaining. Journal of Economic Behavior and Organization, 3, Harley, E. Hindsight bias in legal decision making. Social Cognition, 25 1 , Harford, T. Behavioral economics and public policy. The Financial Times. Haynes, L. Test, learn, adapt: Developing public policy with randomised controlled trials.
London: Cabinet Office. Helweg-Larsen, M. Do moderators of the optimistic bias affect personal or target risk estimates? A review of the literature. Personality and Social Psychology Review, 5 1 , Hershfield, H. Increasing saving behavior through age-progressed renderings of the future self. Journal of Marketing Research, 48, S23—S Hirshleifer, D. On the survival of overconfident traders in a competitive securities market.
Journal of Financial Markets, 4 1 , Iyengar, S. When choice is demotivating: Can one desire too much of a good thing? Journal of Personality and Social Psychology, 79, Jenner, E. Hand hygiene posters: Motivators or mixed messages? Journal of Hospital Infection, 60, Johnson, E. Do defaults save lives? Science, , Kahneman, D. Thinking, fast and slow. London: Allen Lane. Maps of bounded rationality: Psychology for behavioral economics.
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The American Economic Review, 93, Representativeness revisited: Attribute substitution in intuitive judgment. Gilovich, D. Kahneman Eds. New York: Cambridge University Press. Evaluation by moments: Past and future. Tversky Eds. Before long, the pigeon pecks at the disk or stimulus regularly. In this circumstance, the pigeon is said to "work" for the food by pecking. The food, then, is thought of as the currency. The value of the currency can be adjusted in several ways, including the amount of food delivered, the rate of food delivery and the type of food delivered some foods are more desirable than others.
Researchers argue that this is similar to labor supply behavior in humans. That is, like humans who, even in need, will only work so much for a given wage , the pigeons demonstrate decreases in pecking work when the reward value is reduced. In human economics, a typical demand curve has negative slope. This means that as the price of a certain good increase, the amount that consumers are willing and able to purchase decreases.
Researchers studying the demand curves of non-human animals, such as rats, also find downward slopes. Researchers have studied demand in rats in a manner distinct from studying labor supply in pigeons. Specifically, in an operant conditioning chamber containing rats as experimental subjects, we require them to press a bar, instead of pecking a small disk, to receive a reward. The reward can be food reward pellets , water, or a commodity drink such as cherry cola. Unlike in previous pigeon studies, where the work analog was pecking and the monetary analog was a reward, the work analog in this experiment is bar-pressing.
Under these circumstances, the researchers claim that changing the number of bar presses required to obtain a commodity item is analogous to changing the price of a commodity item in human economics. In effect, results of demand studies in non-human animals show that, as the bar-pressing requirement cost increase, the number of times an animal presses the bar equal to or greater than the bar-pressing requirement payment decreases.
An evolutionary psychology perspective states that many of the perceived limitations in rational choice can be explained as being rational in the context of maximizing biological fitness in the ancestral environment, but not necessarily in the current one. Thus, when living at subsistence level where a reduction of resources may result in death, it may have been rational to place a greater value on preventing losses than on obtaining gains.
It may also explain behavioral differences between groups, such as males being less risk-averse than females since males have more variable reproductive success than females. While unsuccessful risk-seeking may limit reproductive success for both sexes, males may potentially increase their reproductive success from successful risk-seeking much more than females can. Much of the decisions are more and more made either by human beings with the assistance of artificial intelligent machines or wholly made by these machines. Tshilidzi Marwala and Evan Hurwitz in their book,  studied the utility of behavioral economics in such situations and concluded that these intelligent machines reduce the impact of bounded rational decision making.
In particular, they observed that these intelligent machines reduce the degree of information asymmetry in the market, improve decision making and thus making markets more rational. The use of AI machines in the market in applications such as online trading and decision making has changed major economic theories. Experimental economics is the application of experimental methods , including statistical , econometric , and computational ,  to study economic questions.
Data collected in experiments are used to estimate effect size , test the validity of economic theories, and illuminate market mechanisms. Economic experiments usually use cash to motivate subjects, in order to mimic real-world incentives. Experiments are used to help understand how and why markets and other exchange systems function as they do. Experimental economics have also expanded to understand institutions and the law experimental law and economics. A fundamental aspect of the subject is design of experiments. Experiments may be conducted in the field or in laboratory settings, whether of individual or group behavior.
Variants of the subject outside such formal confines include natural and quasi-natural experiments. Neuroeconomics is an interdisciplinary field that seeks to explain human decision making , the ability to process multiple alternatives and to follow a course of action. It studies how economic behavior can shape our understanding of the brain , and how neuroscientific discoveries can constrain and guide models of economics. It combines research methods from neuroscience , experimental and behavioral economics, and cognitive and social psychology.
Neuroeconomics studies decision making by using a combination of tools from these fields so as to avoid the shortcomings that arise from a single-perspective approach. In mainstream economics , expected utility EU and the concept of rational agents are still being used. Many economic behaviors are not fully explained by these models, such as heuristics and framing. Behavioral economics emerged to account for these anomalies by integrating social, cognitive, and emotional factors in understanding economic decisions. Neuroeconomics adds another layer by using neuroscientific methods in understanding the interplay between economic behavior and neural mechanisms.
By using tools from various fields, some scholars claim that neuroeconomics offers a more integrative way of understanding decision making. From Wikipedia, the free encyclopedia. Part of a series on Economics Index Outline Category. History Branches Classification. History of economics Schools of economics Mainstream economics Heterodox economics Economic methodology Economic theory Political economy Microeconomics Macroeconomics International economics Applied economics Mathematical economics Econometrics. Concepts Theory Techniques. Economic systems Economic growth Market National accounting Experimental economics Computational economics Game theory Operations research.
By application. Notable economists. Glossary of economics. Social scientists. Government programs. Government agencies. Related concepts. Behavioral economics Social proof Default effect Libertarian paternalism Choice architecture Social engineering IT-backed authoritarianism Design for behaviour change.
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Nudge theory in business. Loyalty program Safety culture. See also: Dynamic inconsistency. Main article: Nudge theory. Main article: Behavioral game theory. Main article: Evolutionary psychology. Further information: Evolutionary economics. Main article: Artificial intelligence. Main article: Experimental economics. Main article: Neuroeconomics. Simon Vernon L. Adaptive market hypothesis Behavioralism Behavioral operations research Big Five personality traits Confirmation bias Cultural economics Culture change Economic sociology Emotional bias Fuzzy-trace theory Hindsight bias Homo reciprocans Important publications in behavioral economics List of cognitive biases Market sentiment Methodological individualism Nudge theory Observational techniques Praxeology Priority heuristic Regret theory Repugnancy costs Socioeconomics Socionomics.
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