xii
heuristics and biases. The expansion has been caused by several factors: (1) there has
been a large amount of relevant research over the last four years, requiring substantial
updating of much material; (2) there were some signifi cant omissions in the fi rst
edition which needed to be rectifi ed, and many of these were drawn to our attention
by reviewers, to whom we are most grateful; (3) experience of teaching various
courses in behavioral economics over the last few years has prompted us to change
the presentation of some materials for pedagogical reasons; and (4) additional rigor of
analysis has been provided in certain areas.
In summary, the intention is to provide a book which is comprehensive, rigorous
and up-to-date in terms of reviewing the latest developments in the fi eld of behavioral
economics; cross-disciplinary in approach; and user-friendly in terms of exposition,
discussing a large number of examples and case studies to which the reader can relate.
Typically three case studies are included at the end of each chapter, with questions
reviewing the relevant material.
It is also appropriate here to give a note of apology: readers may fi nd some
repetitiveness in the materials in the various chapters. We offer the following excuses.
Some readers or instructors may wish to skip certain chapters, like the more technical
chapter on game theory. Also, many of the themes in different chapters are linked, with
the features of prospect theory and mental accounting in particular applying in many
different areas. As a fi nal point, it seems appropriate to hammer home certain points
of behavioral analysis, especially when these are at variance with other commonly-held
theories or beliefs.
Lastly, some words of thanks are in order regarding several people who have
helped to improve this edition of the book. Matthew Rablen, from Brunel University,
invited the fi rst author to share the teaching of a course in behavioral economics, and
discussions with him have aided various aspects, notably the mathematical exposition
in the text. The students there, and at other institutions, have also made various
suggestions and contributions. In particular, we would like to thank Thomas Matura
for drawing attention to the phenomenon of celebrity contagion. Finally, we would like
to thank our anonymous reviewers for their comments and suggestions, which have
allowed us to improve the text in many respects. Of course, any remaining inaccuracies
and oversights are the sole responsibility of the authors.
xiii
Acknowledgments
The following publishers kindly granted permission to reprint the material that appears in the book.
The Economist
Loss aversion in monkeys (23/06/05)
The joy of giving (12/10/06)
Pursuing happiness (29/06/06)
Do economists need brains? (24/07/08)
The way the brain buys (18/12/08)
Fakes and honesty (24/06/10)
Too good to live (19/08/10)
The American Economic Association
Fehr, E., and Gächter, S. (2001). Fairness and retaliation.
Journal of Economic Perspectives, 3,
Figure 2, 167.
Frederick, S., Loewenstein, G., and O’Donoghue, T. (2002). Time discounting and time preference:
A critical review.
Journal of Economic Literature, 40(2), Table 1, 378–9.
Cambridge University Press
Camerer, C.F. (2000). Prospect theory in the wild: Evidence from the fi eld. In D. Kahneman and
A. Tversky (Eds),
Choices, Values, and Frames, Table 16.1, 289.
Princeton University Press
Camerer, C.F. (2003). Behavioral Game Theory, Table 6.3, 272.
OECD
OECD (2003). Gross private savings rates.
OECD Economic Studies, 36 (1), Figure 1, 120.
We should also like to thank the following authors for granting personal permission to reproduce
their work:
Colin Camerer, Ernst Fehr, Shane Frederick, Simon Gächter, George Loewenstein and Ted
O’Donoghue.
1
Nature of Behavioral Economics
1.1 Behavioral economics and the standard model
2
What is behavioral economics?
2
Economic
rationality
3
Behavioral perspectives on economic rationality
8
Nature of the standard model
10
Applicability of the standard model
11
1.2 History and evolution of behavioral economics
12
The classical and neoclassical approaches
13
Post-war economic approaches
13
The resurgence of behaviorism in economics
14
1.3 Relationship with other disciplines
15
Evolutionary
biology
15
Cognitive
neuroscience
17
1.4 Objectives, scope and structure
19
Objectives
19
Structure
19
1.5 Summary
20
1.6 Review
questions
20
1.7 Applications
20
Case 1.1
Loss aversion in monkeys
21
Case 1.2
Money illusion
23
Case 1.3
Altruism – the joy of giving
26
CHAPTER
•
1