Introduction to Behavioral

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The standard model of rationality in economics is essentially a decision-making model, 

which claims to be both 

descriptive and normative. This means that the model is 

supposed to both accurately describe how people behave, and to prescribe how they 

should behave to achieve a certain given objective.

Unfortunately, the term normative is used in two main different senses by 

economists, causing confusion. Sometimes it is used in the sense of being opposite 

to positive. 

Positive statements relate to descriptions involving factual information. 

Such statements can be judged to be correct or incorrect, often with a margin of error, 

based on empirical observation. 

Normative statements in this context relate to value 

judgments, which are necessarily subjective, and cannot be judged to be correct or 

incorrect empirically. An example is statement 1:

 Statement 

1  It is not fair that Firm A pays its workers such a low wage.

Such statements often include the words ‘ought’ or ‘should’; for example, we might 

modify the above statement by saying:

Statement 2 

Firm A ought to pay its workers a higher wage.

However, care must be exercised here, because statements including these words are 

not always normative in the sense of involving a value judgment. An example is: 

Statement 3 

Firm A ought to pay its workers a higher wage if it wants to 

 maximize 

profi t.

Statement 3 does not involve a value judgment, and can be evaluated empirically. Of 

course, one can question the social value of profi t, but that is a separate issue.

Confusion can arise because the last type of statement is also often referred to as 

normative. In this context the term normative is interpreted as a statement that refers 

to behavior as it should be if it were to accomplish goals in an optimal way, in contrast 

to a descriptive statement that describes behavior as it actually is.

It is perhaps preferable to label it as prescriptive, as opposed to descriptive. 

Prescriptive statements can be considered as policy implications, for individuals, fi rms 

or governments, in terms of being guides to behavior, assuming a particular objective or 

set of values. Thus such statements, or ‘normative theories’ as they are often referred 

to, tend to involve some kind of optimization. A fundamental example is the theory 

of expected utility maximization. Prescriptive statements in the above sense always 

follow logically from descriptive statements; for example, Statement 3 can be restated 

as follows:

Statement 4 

In Firm A’s situation a higher wage will maximize profi t.

A more precise prescription would determine the specifi c level of wage that would maximize 

profi t. Thus such prescriptive statements can also always be evaluated empirically.

Normative, in the sense of prescriptive, statements have various sources of appeal 

to social scientists (Niv and Montague, 2008):

1   Throughout evolutionary history animal behavior has been shaped and 

constrained by its infl uence on fi tness, so a reasonable starting point for theory or 

model development is to view a particular behavior as an optimal or near-optimal 

adaptation to some set of problems (Kacelnik,

 1997).

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2   Discrepancies between observed behavior and the predictions of normative 

models are often illuminating. They can shed light on the neural and informational 

constraints under which animals make decisions, relating to Simon’s concept of 

bounded rationality, leading to heuristics and biases. Alternatively, they may 

suggest that animals are in fact optimizing something other than what the model 

assumed.

3   Treating behavior as optimal allows for the generation of computationally explicit 

hypotheses that are directly testable. A simple example is the ‘marginal cost equals 

marginal revenue’ rule for profi t maximization.

When referring to normative statements as value judgments, it should be noted that 

sciences in general, including social sciences like economics, are not in any privileged 

position in terms of making such statements. The privilege which scientists enjoy is that 

they are better able to understand the factual implications of value judgments. Thus while 

an economist may not have any superior ‘moral authority’ in judging whether Firm A is 

acting fairly, she may be able to point out that its existing low wage strategy is likely to 

cause more labor unrest, higher labor turnover, and higher recruiting and training costs.

As far as this book is concerned our interest is not the validity of normative 

statements as value judgments but the question why people make certain value 

judgments; this is a psychological issue that has important policy implications in the 

prescriptive sense. We will also see that the standard model is essentially a normative 

model in this prescriptive sense, while behavioral approaches are largely based on 

descriptive models. Indeed, Tversky and Kahneman (1986) claim that no theory of 

choice can be both normatively adequate and descriptively accurate.

Take the example of a game of tic-tac-toe (‘noughts and crosses’), where two 

players compete on a three-by-three grid to fi rst succeed in placing three of their own 

marks in a straight line. As is well known, in this game the best play from each player 

results in a draw. In other words, there exists a strategy for each player that ensures that 

they will not lose regardless of how their opponent plays (and if their opponent makes a 

mistake it will allow them to win). Call this their rational strategy. It is clear that if they 

seek to win they should adopt this strategy. Likewise, assuming that they know this and 

behave accordingly, this strategy will accurately account for their moves in the game. 

Most situations faced by economic actors are more complex than a game of tic-tac-

toe. A purely rational decision model will not account for how most individuals react in 

a large range of situations. If we still want to understand and explain their choices, what 

we need is not a model that is able to explain moves along the best-response strategy 

path but instead a model that explains moves along the actual-response strategy path 

which in many instances could be bettered. In this sense, individuals appear to act 

irrationally to the extent that they deviate from the best-response path.

But what do we mean by ‘rational’ here? The terms ‘rationality’, and its opposite,  

‘irrationality’, are used extensively in economics, and particularly in connection with 

behavioral economics. It is in many ways a fundamental assumption underlying the 

whole of the discipline. Indeed many people think of behavioral economics as being 

an approach to understanding why people act irrationally. For example, the behavioral 

economist Dan Ariely has written extensively about the subject in his popular books 

Predictably Irrational and The Upside of Irrationality (2008; 2010). In the context of 

our game of tic-tac-toe, players knowingly deciding against the adoption of the best 

response strategy would act irrationally in the sense that they would not choose the 

means best suited to further their end of seeking to win the game.

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