Behavioral Economics Handout Behavioral economics (a.k.a. psychology and economics) incorporates insights and methods from psychology (and sometimes sociology and anthropology) into economic analysis of decision ‐ making. • Non ‐ traditional preferences . E.g., concern for others’ well ‐ being: altruism, fairness, and desire for status (relative position), social identity, group identity. • Mistakes in maximizing well ‐ being . o Errors in reasoning and belief ‐ formation . E.g., the Law of Small Numbers and gambler’s fallacy, confirmatory bias. o Systematic deviations of decision preferences (behavior) from welfare preferences . E.g., status quo bias (inertia), indulging immediate gratification / temptation, addiction. Experimental economics uses experimental methods ‐‐‐ human subjects put into a decision ‐ making situation, usually with a treatment group and a control group ‐‐‐ to learn about decision ‐ making and economic institutions. There is much overlap between behavioral economics and experimental economics, but some
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