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Psychology and Economics: Evidence from the Field

Psychology and Economics: Evidence from the Field -...

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Psychology and Economics: Evidence from the Field Stefano DellaVigna UC Berkeley and NBER [email protected] Forthcoming, Journal of Economic Literature 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 pref- erences; (ii) non-standard beliefs; and (iii) non-standard decision-making. In this paper, I survey the empirical evidence from the fi eld on these three classes of deviations. The evi- dence covers a number of applications, from consumption to fi nance, from crime to voting, from charitable giving to labor supply. In the class of non-standard preferences, I discuss time preferences (self-control problems), risk preferences (reference dependence), and so- cial preferences. On non-standard beliefs, I present evidence on overcon fi dence, on the law of small numbers, and on projection bias. Regarding non-standard decision-making, I cover framing, limited attention, menu e ff ects, persuasion and social pressure, and emo- tions. I also present evidence on how rational actors– fi rms, employers, CEOs, investors, and politicians–respond to the non-standard behavior described in the survey. Finally, I brie fl y discuss under what conditions experience and market interactions limit the impact of the non-standard features. I would like to thank Roger Gordon (the editor), three exceptionally careful referees, Dan Acland, Malcolm Baker, Brad Barber, Nicholas Barberis, Dan Benjamin, Saurabh Bhargava, Colin Camerer, David Card, Raj Chetty, James Choi, Sanjit Dhami, Constanca Esteves, Ernst Fehr, Shane Frederick, Drew Fudenberg, David Hirshleifer, Eric Johnson, Lawrence F. Katz, Georg Kirchsteiger, Je ff rey Kling, Howard Kunreuther, David Laibson, George Loewenstein, Erzo F.P. Luttmer, Rosario Macera, Ulrike Malmendier, MichelAndre Marechal, John Morgan, Ted O’Donoghue, Ignacio Palacios-Huerta, Joshua Palmer, Vikram Pathania, Matthew Rabin, Ricardo Reis, Uri Simonsohn, Rani Spiegler, Bjarne Ste ff en, Justin Sydnor, Richard Thaler, Jeremy Tobacman, Michael Urbancic, Ebonya Washington, Kathryn Zeiler, and Jonathan Zinman for useful comments and sug- gestions. Thomas Barrios, Charles Lin, and Anitha Sivasankaran provided excellent research assistance. I also want to thank the students of my Psychology and Economics graduate class who over the years helped shape the ideas in this paper. Finally, I would like to express all my gratitude to David Laibson and Matthew Rabin for their exceptional generosity in sharing their insights with the next generations of behavioral economists. This paper would not have been possible without them.
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1 Introduction The core theory used in economics builds on a simple but powerful model of behavior. In- dividuals make choices so as to maximize a utility function, using the information available, and processing this information appropriately. Individuals’ preferences are assumed to be time-consistent, a ff ected only by own payo ff s, and independent of the framing of the decision.
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