The Cardinal Anomalies that Led to Behavioral Economics: Cognitive or Motivational?

Abstract

The field of behavioral economics (BE) has been defined by the study of anomalies in choice, that is, choices that do not obey what is called rational choice theory or expected utility theory. Expected utility theory holds that an intelligent and well‐informed agent (‘economic man’) will make choices that maximize his expected utility, which by implication means avoiding choice patterns that would make him (her hereafter) vulnerable in competitive markets—for instance, to be money pumped, or make intransitive choices or choices that could be reversed by reframing. Research in two disparate schools has found that people commit a number of apparent violations of the maximizing principle. These traditions have formed the two legs on which BE stands: behavioral and cognitive.During the 1970s and 1980s, both schools found anomalies in expected utility theory that called for new approaches. The behavioral school revealed anomalies in choice as a function of intertemporal differences in motivation, thus creating the topics of dynamic inconsistency and hyperbolic and quasihyperbolic delay discounting. The cognitive school revealed anomalies in choice as a function of cognitive framing, which are summarized in prospect theory. These anomalies have remained the cardinal phenomena of BE. Critics have called the resulting literature ‘a ragbag’, but I argue that the 12 best‐known framing effects have coherent motivational roots. Most anomalies that persist after reflection can be understood as strategies in intertemporal bargaining, for maximizing hyperbolically discounted utility (or reward). Published 2015. This article is a U.S. Government work and is in the public domain in the USA