Collaborative Research on Behavioral Economics

University Of California-Berkeley, Berkeley CA

Investigators

Abstract

Although the rational-choice model used by economists has yielded an array of insights across a broad range of human activities, research from psychology suggests that it is inaccurate in some systematic and important ways. This project will continue an agenda of integrating psychologically more realistic assumptions about human behavior into formal economic models. Much of the research will focus on intertemporal choice, and in particular on two specific more realistic assumptions. First, whereas the rational-choice model assumes that people do not change their willingness to delay gratification over time, evidence suggests that, from a prior perspective, people would like to behave patiently, while at the moment of action, people behave impatiently. Second, whereas the rational-choice model assumes that people correctly predict future tastes, evidence suggests people tend to exaggerate the degree to which their future tastes will resemble their current tastes. This project will investigate the implications of these errors in three distinct environments. First, the project will study procrastination, both patterns of procrastinatory behavior and policies designed to combat procrastination. Second, the project will study distortions in consumption behavior when the pleasure generated by consumption depends on one's accustomed or habitual consumption level. Third, the project will study the consumption of harmful addictive substances, and in particular whether and how these errors can cause people to hurt themselves by developing harmful addictions (the rational-choice model can attribute harmful addictions only to bad luck). The project will also investigate additional more realistic assumptions. This research, and the broader agenda of which it is a part, will dramatically improve economic analysis, and promote a more realistic analysis of policies designed to address savings behavior, addiction, procrastination, obesity, and similar phenomena. For many questions, the standard rational-choice model provides a satisfactory apparatus. But for other questions, such as why do people procrastinate, develop harmful addictions, or are overweight, the rational-choice model is importantly flawed, requiring implausible explanations for observed behavior and leading to harmful policy recommendations. The research demonstrates how economists can derive alternative more realistic assumptions from research in psychology, and how these alternative assumptions can provide better explanations for behavior, and yield more sensible policy recommendations.