What is Behavioral Economics?

Abstract

This paper is concerned with defining the characteristics of behavioral economics (BE), identifying the different strands of BE, and carefully comparing BE to mainstream or orthodox economics. An important question here is: Is BE an economic school of thought? It is noteworthy that BE is not strongly associated with a political economic ideology or particular substantive propositions as is the case with some other economic schools of thought. What distinguishes BE is its scientific practices and its guiding notions of what good scientific practice ought to be. In other words, BEs practice and espouse scientific methods that are different, at least, from those typical of mainstream economics (ME). This paper develops an approach to comparing BE to other types of economics. The job of comparison is first to identify the key dimensions (related to its approach to science) along which BE, and its different strands, differs from ME, and second to use these dimensions to illustrate the differences. The desired dimensions of comparison are ones for which there are critical and important differences between BE and ME. Further, these dimensional differences are related to BE's critique of ME and how behavioral economists describe their attempts to distinguish themselves from ME. The dimensions selected for this use are: 1) narrowness, 2) rigidity, 3) intolerance, 4) mechanicalness, 5) separateness, and 6) individualism. Comparing economic disciplines using the comparison dimensions is like locating places on a map, except that the map of the economic disciplines is a six dimensional one, not a two dimensional one. To locate a discipline on the map, it is necessary to have judgments of the discipline's location on each of the six dimensions. In a sense, we are discovering what BE is partly by finding out its characteristics, but partly by finding out its differences from certain other well known entities (disciplines). After using these dimensions to characterize ME, they are used to characterize BE's strands starting with the two earliest strands of BE, those emanating from the work of Herbert Simon and George Katona. The other strands of BE considered here are psychological economics, Harvey Leibenstein's x-efficiency theory, George Akerlof and behavioral macroeconomics, behavioral finance, Vernon Smith and experimental economics, and the evolutionary theory of Richard Nelson and Sidney Winter. Other elements of BE that can not be classified in these strands are also considered.