Behavioral Economics

487 Pages·2011·5.35 MB·English

by  Edward Cartwright

Behavioral Economics
Over the last few decades behavioral economics has revolutionized economics. It
has done so by putting the human back into economics, by recognizing that people
sometimes make mistakes, care about others, and are generally not as cold and
calculating as economists have traditionally liked to think they are. The results
have been exciting, fascinating, and have fundamentally changed the way we look
at economic behavior. This book will show you why.
A ll the main results and insights of behavioral economics are introduced at an
intuitive level, with important ideas like mental accounting, prospect theory,
present bias, inequality aversion, and learning explained in detail. These insights
are also applied in diverse settings to show you why behavioral economics is
crucial to understanding the world around us. The book covers auctions, stock
market crashes, giving to charity, health care, saving for retirement, the gender
gap, addiction, and much more.
T he intriguing new subject of neuroeconomics is covered in depth, as is the role
that evolution and culture may have played in shaping modern economic behavior.
Consideration is also given to what makes people happy, and how we can poten-
tially nudge them to be happier. This makes for an accessible and comprehensive
text that will be of great value to the students who use it.
Edward Cartwright is Lecturer in Economics at the University of Kent at
Canterbury, United Kingdom.
Routledge advanced texts in economics and fi nance
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Behavioral Economics
Edward Cartwright
First published 2011
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
This edition published in the Taylor & Francis e-Library, 2011.
To purchase your own copy of this or any of Taylor & Francis or Routledge’s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.
© 2011 Edward Cartwright
The right of Edward Cartwright to be identifi ed as author of this work has
been asserted by him in accordance with the Copyright, Designs and
Patents Act 1988.
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic,
mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in
writing from the publishers.
Trademark notice : Product or corporate names may be trademarks or
registered trademarks, and are used only for identifi cation and explanation
without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
A catalog record has been requested for this book
ISBN 0-203-81686-2 Master e-book ISBN
ISBN: 978-0-415-57309-2 (hbk)
ISBN: 978-0-415-57312-2 (pbk)
ISBN: 978-0-203-81686-8 (ebk)
Dedicated to Kerry, Robert and Anna

Contents
Preface ix
PART I
Introduction 1
1 An introduction to behavioral economics 3
PART II
Economic behavior 25
2 Simple heuristics for complex choices 27
3 Choice with risk 85
4 Choosing when to act 135
5 Learning from new information 169
6 Interacting with others 211
7 Social preferences 263
PART III
Origins of behavior 309
8 Evolution and culture 311
9 Neuroeconomics 344
viii Contents
PART IV
Welfare and policy 391
10 Happiness and utility 393
11 Policy and behavior 432
Bibliography 457
Index 472
Preface
T he origins of this book are four or fi ve years ago when I started teaching a course
called S trategy and Games to fi rst year undergraduates. The idea of the course was
to illustrate through classroom experiments some of the basic ideas of economics
and game theory. In teaching that course my interest and knowledge of behavioral
economics grew a lot; as did my frustration at the limited resources available
to students wanting to learn more about this fascinating area of economics.
Eventually, I decided it was time to write this book.
My basic objective when writing the book was to convey both the excitement and
the importance of behavioral economics. I wanted to explain the basic principles,
ideas and results of behavioral economics and show how fascinating they are. I also
wanted to illustrate through applications why behavioral economics is fundamentally
important in understanding the world around us. I wanted a book that was accessible
to a general reader, not just those trained in economics, and/or comfortable with
algebra. You can be the judge of whether I achieved what I set out to do.
I could not have written this book without those who have contributed to the
literature on behavioral economics and given me such great material to work with.
Particular thanks are due to those who made my job so easy by writing papers over
many years that, when put together, gave very clear insights into economic
behavior. I would love to thank these people publicly, but in writing their names
it would probably be all too obvious which names I do not mention. I will, there-
fore, reserve my thanks for now. I just hope to have done justice to the great work
out there. I should also make clear that the opinions expressed in this book are
mine, and not necessarily those of the researchers whose work I refer to. Any
mistakes are mine as well.
I can be a lot freer in the thanks for my wife Anna, who has helped so much in
writing this book. On a personal level she has been patient and supportive while I
wrote it. On a practical level, she is my greatest critic, never happy until every-
thing is explained as fully and clearly as possible; she is also a great source of new
ideas and new ways of thinking about old ideas. I should also thank all the students
and colleagues connected with the Strategy and Games course, for teaching me so
much. Finally, I want to give a big thanks to Myrna Wooders who, as well as
being a fantastic person to know, has long been, and continues to be, a great
inspiration and mentor.