Working Paper: NBER ID: w13420
Authors: Stefano Dellavigna
Abstract: The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (i) non-standard preferences; (ii) non-standard beliefs; and (iii) non-standard decision-making. In this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from giving to labor supply. In the class of non-standard preferences, I discuss time preferences (self-control problems), risk preferences (reference dependence), and social preferences. On non-standard beliefs, I present evidence on overconfidence, on the law of small numbers, and on projection bias. Regarding non-standard decision-making, I cover limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors -- firms, employers, CEOs, investors, and politicians -- respond to the non-standard behavior described in the survey. I then summarize five common empirical methodologies used in Psychology and Economics. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the non-standard features.
Keywords: Behavioral Economics; Psychology; Economic Behavior; Field Evidence
JEL Codes: A1; C91; C93; D00; D64; D91; G1; M3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonstandard preferences (D11) | decision-making processes (D70) |
| self-control problems (D91) | immediate gratification (D15) |
| immediate gratification (D15) | higher overall costs (J32) |
| overconfidence (G41) | poor financial decisions (D14) |
| overconfidence (G41) | excessive project investments (G31) |
| social pressures and emotional factors (D91) | decision-making (D70) |