Chapter 3 - Evolving Models of Addictive Behavior: From Neoclassical to Behavioral Economics

Abstract

This chapter discusses the economic models of addiction and their applications to cigarette demand. It also talks about the relationship between rational addiction and behavioral economics models of addiction, and reviews the implications for the effects of price on cigarette demand from the relatively new field of behavioral economics.. The behavioral economics of addiction in general, and smoking in particular, provide a framework for considering behavior that the traditional economics and rational addiction models do not fully address. These rational addiction models represent important advances in the understanding of addictive behaviors. In order to understand addiction, economists needed to address the issue of whether addiction behavior could be characterized as rational. Early models of addiction characterized smokers' preferences as generally stable, but imperfectly rational. In these models, addiction was explained by inconsistencies between smokers' short-run and long-run preferences, whereby smokers wanted to quit in the long run, but they were driven by their short term preference to have a cigarette at the moment. Early models of addiction characterized demand for addictive products, like cigarettes, as myopic. In other words, demand depended on past and perhaps current levels of consumption but ignored future preferences. By incorporating future expectations about prices and consumption levels into the myopic model, the idea of rational addiction evolved.