Introduction to Behavioral

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in the world external to the organism under study. In many ways thus, cognitive 

neuroscience studies behavior, and decision-making in particular, in ways that are 

relevant for the attempts of economists to understand the material basis of decision-

making. This led to the formation of the new fi eld of neuroeconomics, which refers to 

the use of empirical evidence relating to brain activity in order to come to conclusions 

relating to economic behavior.

Cognitive neuroscience has seen signifi cant empirical advances made possible by a 

number of recent technological developments, particularly in terms of brain scanning 

and imaging techniques like PET (positron emission tomography), fMRI (functional 

magnetic resonance imaging), EEG (electroencephalography), rCBF (regional cerebral 

blood fl ow) and TMS (transcranial magnetic stimulation). These methods detect (or in 

the case of TMS, block) brain activity in particular areas in terms of electrical activity or 

increased blood fl ow, and this has been used to shed light on various topics of interest 

in behavioral economics. Relevant results have been infl uential in the area of decision-

making heuristics, learning processes and the role of the emotions.

Perhaps the most fundamental discovery in neuroscience has been the concept of 

brain modularity. This means that different types of thinking or mental process are 

performed in different parts of the brain, indicating the importance of brain structure or 

anatomy, and it is attributed to evolutionary processes, whereby new parts of the brain 

have been successively added to older more primitive parts, and have become more 

developed over time. One of the most profound consequences of modularity, certainly 

as far as behavioral economics is concerned, is that humans have different decision-

making systems that operate in different circumstances. The most obvious illustration 

of this is that we have a ‘cold’ rational system for reasoning through some problems, 

like doing a crossword puzzle, and a ‘hot’ system involving emotions, that tends to 

operate, for example, when somebody cuts in front of us in a traffi c jam. We also fi nd 

that we tend to perform some processes automatically, like a skilled musician playing 

the piano, without conscious thought about what keys to play, whereas other actions 

require conscious decisions, for example, where a beginner is attempting to play the 

same piece. The reason why this aspect of brain modularity is signifi cant for behavioral 

economics is that there are often confl icts between different systems, and these can 

cause phenomena such as preference reversals and time-inconsistent preferences, that 

are frequently observed anomalies in the standard model. There are executive control 

systems that mediate these different systems, and these are necessary in order to bring 

into effect some action when there are internal confl icts. However, it is important 

that we do not think of these control systems as being the ‘self’, or the ‘I’, that decides. 

This would amount to Cartesian Dualism, or a belief in what the philosopher Gilbert 

Ryle has termed ‘the ghost in the machine’ (Ryle, 1949). Executive control systems 

may indeed operate subconsciously, for example, when we run from a wasp fl ying 

toward us.

Another important discovery in neuroeconomics is that different chemicals and 

hormones have a signifi cant infl uence on behavior. Given these developments, various 

examples of neuroeconomic studies will be given throughout the book. It is important 

to realize, though, that relevance and application of neuroeconomics has remained a 

controversial issue in the discipline.

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1.4  Objectives, scope and structure

Objectives

In view of the foregoing discussion, this book has the following major objectives:

1  Present the principles and methods of behavioral economics in a logical and 

amenable manner, comparing and contrasting them with those of the standard 

model.

2  Illustrate how behavioral models represent an improved modifi cation  and 

refi nement of the standard model in terms of power of explanation and 

prediction, using a wide variety of empirical examples from both observational 

and experimental studies.

3  Provide a critical examination of the existing literature relating to behavioral 

economics.

4  Explain the policy implications of behavioral economics, particularly when these 

differ from those of the standard model.

5  Provide a coherent psychological framework underpinning the fi ndings  of 

behavioral economics.

6  Indicate the way forward for the subject, in terms of future challenges and areas 

meriting further research.

Structure

In order to achieve the objectives described at the beginning of the section, the book 

is divided into fi ve parts. Following the two introductory chapters in Part I, Part II is 

concerned with the foundations of behavioral economics, in which the fundamental 

concepts of preferences, beliefs, decision-making under risk and uncertainty and 

mental accounting are discussed. This relates to the fi rst, third and fourth components 

of the model in (1.1). Part III of the book examines intertemporal decision-making, 

where costs and benefi ts of decisions are incurred in different time periods. This relates 

to the second component of the model in (1.1). Part IV examines strategic interaction 

and the applications of game theory, which relates to aspects of the third and fourth 

components not discussed earlier. Part V represents a conclusion. We are concerned 

here with summarizing the various aspects of behavioral economics and presenting an 

integrated view of rationality; this part also relates to the sixth objective stated above: 

looking at the future of the discipline.

Within each chapter there is also frequently a typical structure. The principles 

and assumptions of the relevant aspects of the standard model are examined fi rst, 

with a description of shortcomings or anomalies. Various behavioral models are then 

introduced, and these are evaluated in the light of the empirical evidence available, with 

comparisons being made between different models. Normative or policy implications 

are also discussed. Finally, some important applications of behavioral economics are 

examined in more detail in case studies at the end of each chapter.

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