Behavioural Economics: Behavioural Economics: A Peep Into The Future of EconomicsA Peep Into The Future of Economics

Dr. Sanjit DhamiDr. Sanjit Dhami

Department of EconomicsDepartment of Economics

University of LeicesterUniversity of Leicester

United KingdomUnited Kingdom

Plan of the talkPlan of the talkNon-technicalNon-technical introduction to some topics in introduction to some topics in

Behavioural EconomicsBehavioural Economics

Fairness and reciprocityFairness and reciprocity

Behavioural decision making under riskBehavioural decision making under risk

Behavioural decision making over timeBehavioural decision making over time

Behavioural game theoryBehavioural game theory

Role of emotionsRole of emotions

Mental accountingMental accounting

NeuroeconomicsNeuroeconomics

Some preliminary observations on BESome preliminary observations on BE Based strongly on the evidence on human behaviour Based strongly on the evidence on human behaviour

rather than notions of plausibility (e.g. rationality).rather than notions of plausibility (e.g. rationality).

Hence, it is NOT arbitrary or ad-hoc. Fully rational Hence, it is NOT arbitrary or ad-hoc. Fully rational behaviour can be ad-hoc.behaviour can be ad-hoc.

Rigorous empirically and theoretically (much of it is Rigorous empirically and theoretically (much of it is axiomatically founded).axiomatically founded).

In many cases, explains most things that standard In many cases, explains most things that standard economics does + MORE. This is how any science economics does + MORE. This is how any science progresses.progresses.

““Economic theory is largely based on an unrealistic picture of human Economic theory is largely based on an unrealistic picture of human decision making. Economic agents are portrayed as fully rational decision making. Economic agents are portrayed as fully rational Bayesian maximizers of subjective utility. This view of economics is Bayesian maximizers of subjective utility. This view of economics is not based on empirical evidence…” Selten (2001).not based on empirical evidence…” Selten (2001).

““Hot topic in economics is intersection with psychology…people Hot topic in economics is intersection with psychology…people aren’t so rational after all. This gives us reason to hope…” Mankiw aren’t so rational after all. This gives us reason to hope…” Mankiw (2005).(2005).

““Fully rational optimising behaviour is unreasonable…. optimisation is Fully rational optimising behaviour is unreasonable…. optimisation is for Laplacean demons not human beings…” Mervyn King (2005).for Laplacean demons not human beings…” Mervyn King (2005).

““People do not follow the calculus of chance or the statistical theory People do not follow the calculus of chance or the statistical theory of prediction… they rely on a limited number of heuristics which of prediction… they rely on a limited number of heuristics which sometimes yield reasonable judgements and sometimes severe and sometimes yield reasonable judgements and sometimes severe and systematic errors.” Kahneman and Tversky (1973).systematic errors.” Kahneman and Tversky (1973).

““Homo economicus is dead but whose Homo behavioralis will replace Homo economicus is dead but whose Homo behavioralis will replace him?” Ken Binmore (2004)him?” Ken Binmore (2004)

Mathew Rabin (2002): “There are many assumptions economists Mathew Rabin (2002): “There are many assumptions economists often make about human nature that behavioural research often make about human nature that behavioural research suggests are often wrong. These include assumptions that people:suggests are often wrong. These include assumptions that people:

Are Bayesian information processors (Bayes’s story)Are Bayesian information processors (Bayes’s story) Have well defined stable preferencesHave well defined stable preferences Maximize their expected utilityMaximize their expected utility Apply exponential discountingApply exponential discounting Are self-interestedAre self-interested Have preferences over final outcomes, not changesHave preferences over final outcomes, not changes

““Economists are starting to abandon their assumption that humans Economists are starting to abandon their assumption that humans behave rationally, and instead are finally coming to grips with the behave rationally, and instead are finally coming to grips with the crazy, mixed up creatures we really are.” The Economist, 2005.crazy, mixed up creatures we really are.” The Economist, 2005.

““Without having a broad set of facts on which to theorize, there is Without having a broad set of facts on which to theorize, there is a certain danger of spending too much time on models that are a certain danger of spending too much time on models that are mathematically elegant, yet have little connection to actual mathematically elegant, yet have little connection to actual behaviour…it is an interesting question why game theorists have behaviour…it is an interesting question why game theorists have not turned more frequently to psychologists for information about not turned more frequently to psychologists for information about the learning and information processing processes used by the learning and information processing processes used by humans.” Eric Van Damme (1999).humans.” Eric Van Damme (1999).

Fairness and ReciprocityFairness and Reciprocity Economics relies on (1) rationality (2) self interested individuals Economics relies on (1) rationality (2) self interested individuals

(derive utility from own consumption). Both are in doubt.(derive utility from own consumption). Both are in doubt.

A wealth of experimental evidence indicates that only 40-50 A wealth of experimental evidence indicates that only 40-50 percent are selfish. The others have percent are selfish. The others have social preferencessocial preferences i.e. have i.e. have regard for the consumption or welfare of others.regard for the consumption or welfare of others.

Intrinsic ReciprocityIntrinsic Reciprocity: Humans seem to be : Humans seem to be conditional cooperatorsconditional cooperators i.e. are kind to those who are kind and unkind to those who are i.e. are kind to those who are kind and unkind to those who are unkind (different from unkind (different from altruismaltruism) (Evolutionary reasons)) (Evolutionary reasons)

Instrumental reciprocityInstrumental reciprocity: Standard economics reasons that : Standard economics reasons that cooperation results from self interest (not instrinsic reciprocity).cooperation results from self interest (not instrinsic reciprocity).

Implications of intrinsic reciprocity are deeply profound for Implications of intrinsic reciprocity are deeply profound for economics. Even if there is small fraction of conditional co-economics. Even if there is small fraction of conditional co-operators the outcome can change dramaticallyoperators the outcome can change dramatically

Simplest experiment: Ultimatum GameSimplest experiment: Ultimatum Game

Single Single proposerproposer has £1. Offers a share 0≤s ≤£1 to a has £1. Offers a share 0≤s ≤£1 to a responderresponder who can either accept (1-s,s) or reject (0,0). who can either accept (1-s,s) or reject (0,0).

Stackelberg-Nash prediction: s=1p. The evidence is…Stackelberg-Nash prediction: s=1p. The evidence is…

1. The mean offer is s=30-40p, median is s=40-50p.1. The mean offer is s=30-40p, median is s=40-50p.2. There are rarely any unfair offers (0-10p) or overfair 2. There are rarely any unfair offers (0-10p) or overfair

ones (s>50p).ones (s>50p).3. Nash prediction true for autistics, an amazon tribe.3. Nash prediction true for autistics, an amazon tribe.

Main motive for rejection of low offers is that they are Main motive for rejection of low offers is that they are perceived as perceived as unfairunfair..

Under “responder competition” the outcome is s=1p as Under “responder competition” the outcome is s=1p as the possibilities of punishment are reduced. the possibilities of punishment are reduced.

Lesson: Lesson: There is selfishness in anonymous markets, and There is selfishness in anonymous markets, and fairness in bilateral interactionsfairness in bilateral interactions..

Public Good Game and voluntary cooperationPublic Good Game and voluntary cooperation 5 subjects are each given £20.5 subjects are each given £20. Each contributes 0≤Each contributes 0≤xxii ≤20 to a public good. ≤20 to a public good. Total contribution is: Total contribution is: x=xx=x11 +…+ +…+ xx55 Experimenter returns 40% of Experimenter returns 40% of xx to each subject. to each subject.

Cooperative optimalCooperative optimal: Each contributes £20 so : Each contributes £20 so gets 0.4(100)=40>20.gets 0.4(100)=40>20.

Free riding: If the first 4 subjects each contribute Free riding: If the first 4 subjects each contribute £20 and the 5£20 and the 5thth one does not contribute he gets one does not contribute he gets 20+0.4(4*20)=52>40. Hence, all free ride.20+0.4(4*20)=52>40. Hence, all free ride.

Nash Prediction : nobody will contribute.Nash Prediction : nobody will contribute.

Experimental evidence is close to this result but Experimental evidence is close to this result but not quite (period effects).not quite (period effects).

Public good game with punishmentPublic good game with punishment Suppose at the end, contributors are allowed to punish Suppose at the end, contributors are allowed to punish

non-contributors at some personal cost.non-contributors at some personal cost.

Nash Prediction: No punishment (ignore bygones). So Nash Prediction: No punishment (ignore bygones). So complete free riding again.complete free riding again.

Evidence contradicts Nash prediction. High cooperation Evidence contradicts Nash prediction. High cooperation (all contribute nearly £20/each). And non co-operators (all contribute nearly £20/each). And non co-operators are heavily punished by co-operators. Why?are heavily punished by co-operators. Why?

Humans are Humans are conditional co-operatorsconditional co-operators; reciprocate ; reciprocate kindness with kindness and unkindness with kindness with kindness and unkindness with unkindness even at a personal cost. unkindness even at a personal cost.

This alters a great deal of existing economics.This alters a great deal of existing economics.

Some applicationsSome applications Too great a use of incentives (performance related pay, fines Too great a use of incentives (performance related pay, fines

etc.) by firms, is sometimes perceived as hostile INTENT by the etc.) by firms, is sometimes perceived as hostile INTENT by the firm and such measures can be counterproductive.firm and such measures can be counterproductive.

Implicit incentives, such as bonuses, which are predicted to be Implicit incentives, such as bonuses, which are predicted to be useless in static games elicit much greater effort and profits.useless in static games elicit much greater effort and profits.

Fehr et al (2007, Econometrica) show in their experiments:Fehr et al (2007, Econometrica) show in their experiments:1.1. About 90 % of firms choose bonus over incentive contracts.About 90 % of firms choose bonus over incentive contracts.2.2. Principals use bonuses conditional on effort levels (reciprocity).Principals use bonuses conditional on effort levels (reciprocity).3.3. The hope that reciprocal principals will reward effort, also elicits The hope that reciprocal principals will reward effort, also elicits

high effort from agents.high effort from agents.

Bewley (1997, HUP) shows that ALL existing mainstream labour Bewley (1997, HUP) shows that ALL existing mainstream labour market theories are REJECTED. Firms do not cut wages in a market theories are REJECTED. Firms do not cut wages in a recession as that would be perceived as UNFAIR and workers recession as that would be perceived as UNFAIR and workers would then reduce effort. Maintaining would then reduce effort. Maintaining worker’sworker’s moralemorale is the is the chief consideration.chief consideration.

Some lessons from behavioural game theory (BGT) Some lessons from behavioural game theory (BGT) compared to classical game theory (CGT)compared to classical game theory (CGT)

There is now sizeable evidence on the following (see the book by Colin There is now sizeable evidence on the following (see the book by Colin Camerer, BGT, Princeton University Press, 2003).Camerer, BGT, Princeton University Press, 2003).

In games where there is a unique Nash equilibrium involving more In games where there is a unique Nash equilibrium involving more

than 2-3 steps of iterated dominance, CGT fails.than 2-3 steps of iterated dominance, CGT fails.

Players often play mixed strategies, but, not those predicted by Players often play mixed strategies, but, not those predicted by

mixed strategy Nash equilibrium.mixed strategy Nash equilibrium.

In coordination games, coordination is extremely hard to achieve.In coordination games, coordination is extremely hard to achieve.

Play in experimental games is heavily history dependent. Play in experimental games is heavily history dependent.

The simplest mechanism design predictions (e.g. the Abreu - The simplest mechanism design predictions (e.g. the Abreu -

Matsushima (1992) mechanism) fail.Matsushima (1992) mechanism) fail.

Evidence on increasingly complicated refinements (beyond the Evidence on increasingly complicated refinements (beyond the

intuitive principle) is almost always strongly negative.intuitive principle) is almost always strongly negative.

Alternatives to Nash equilibrium from BGTAlternatives to Nash equilibrium from BGT

Several alternatives to the Nash equilibrium concept have been Several alternatives to the Nash equilibrium concept have been

proposed (Vincent Crawford’s website and Camerer’s book).proposed (Vincent Crawford’s website and Camerer’s book).

Each of these new equilibrium concepts are strongly grounded in Each of these new equilibrium concepts are strongly grounded in

empirical behaviour of economic agents.empirical behaviour of economic agents.

1.1. Quantal response equilibrium (equilibrium beliefs).Quantal response equilibrium (equilibrium beliefs).

2.2. Level-k models (non-equilibrium beliefs).Level-k models (non-equilibrium beliefs).

3.3. Models of noisy introspection (non-equilibrium beliefs).Models of noisy introspection (non-equilibrium beliefs).

4.4. Psychological game theory (2 step beliefs).Psychological game theory (2 step beliefs).

5.5. Many others (coarse thinking, analogy based equilibrium)Many others (coarse thinking, analogy based equilibrium)

Do Economists need brains? Neuroeconomics Do Economists need brains? Neuroeconomics Neuroscience + Economics = Neuroeconomics.Neuroscience + Economics = Neuroeconomics.

Main objective: Study electrical activity in various parts of the brain Main objective: Study electrical activity in various parts of the brain when subjects are engaged in economic games. when subjects are engaged in economic games.

Evidence: The dorsal striatum (in the midbrain) is an important area Evidence: The dorsal striatum (in the midbrain) is an important area of the brain’s reward/punishment circuits.of the brain’s reward/punishment circuits.

Person 2 intentionally abuses the trust of person 1. Person 1’s Person 2 intentionally abuses the trust of person 1. Person 1’s dorsal striatum is heavily activated when he punishes. Higher dorsal striatum is heavily activated when he punishes. Higher punishment creates greater activation. punishment creates greater activation.

Individuals derive Individuals derive psychic benefits psychic benefits from punishing. This explains from punishing. This explains puzzling results of the public goods game with punishment.puzzling results of the public goods game with punishment.

The striatum is also heavily activated when there is mutual The striatum is also heavily activated when there is mutual cooperation. Hence, we seem to derive intrinsic satisfaction from cooperation. Hence, we seem to derive intrinsic satisfaction from the act of cooperation (over and above instrumental reciprocity).the act of cooperation (over and above instrumental reciprocity).

Decision Making Under RiskDecision Making Under Risk

Expected utility theory (EU) is the most popular Expected utility theory (EU) is the most popular decision theory under risk in economics. decision theory under risk in economics. Suppose we have a lottery: Suppose we have a lottery:

EU evaluates this as:EU evaluates this as:

Empirical evidence overwhelmingly rejects EU; see Empirical evidence overwhelmingly rejects EU; see Starmer (2002, JEL). But this was well known as far Starmer (2002, JEL). But this was well known as far back as Luce and Raiffa (1957).back as Luce and Raiffa (1957).

Main alternative: Nobel prize winning work of Main alternative: Nobel prize winning work of Kahneman and Tversky (1979, 1992): Prospect Theory, Kahneman and Tversky (1979, 1992): Prospect Theory, which we now turn to.which we now turn to.

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Four Features of Prospect TheoryFour Features of Prospect Theory

(1)Reference Dependence

(2) Loss Aversion

(3) Risk aversion in gains and risk seeking in the losses (strictly speaking this is not correct: 4-fold pattern or risk).

Axiomatics: see al-Nowaihi, Bradley and Dhami (2008, Economics Letters). Science Direct Top 25 Paper.

Prospect Theory continuedProspect Theory continued

4. Non-linear weighting of probabilities. Most popular is Prelec’s function.4. Non-linear weighting of probabilities. Most popular is Prelec’s function.

Axiomatic foundations: Drazen Prelec (Econometrica, 1998), Luce (2001,

JMP). al-Nowaihi and Dhami (2006, JMP, Science Direct Top 25 paper).

A new proposal: Composite Prospect TheoryA new proposal: Composite Prospect Theory

• al-Nowaihi and Dhami (2010) combine K-T(1979) and T-K(1992).

• Most satisfactory theory of risk at the moment.

• Axiomatically founded and consistent with the available evidence.

• Explains e.g. insurance behaviour, Becker paradox, non-compliance with

seat belt laws, low take-up of breast cancer examination etc.

Some applications that are problematic for EU to Some applications that are problematic for EU to explain but straightforward for Prospect Theoryexplain but straightforward for Prospect Theory

1.1. Backward bending labour supply (Camerer et. al. QJE, 1997).Backward bending labour supply (Camerer et. al. QJE, 1997).

2. Equity Premium Puzzle (Benartzi-Thaler, QJE, 1996). Returns on 2. Equity Premium Puzzle (Benartzi-Thaler, QJE, 1996). Returns on

stocks-bonds is 7%/1% (from 1926) when SD is 0.2/0. Why?stocks-bonds is 7%/1% (from 1926) when SD is 0.2/0. Why?

3. Asymmetric price elasticities (Hardie et. al, Marketing Sc., 1993).3. Asymmetric price elasticities (Hardie et. al, Marketing Sc., 1993).

4. Tax Evasion puzzles (Dhami and al-Nowaihi, JEBO, 2007, 2010)4. Tax Evasion puzzles (Dhami and al-Nowaihi, JEBO, 2007, 2010)

Returns from evasion of about 99%, why does anyone pay taxes?Returns from evasion of about 99%, why does anyone pay taxes?

EU is unable to explain this. But PT can easily explain it.EU is unable to explain this. But PT can easily explain it.

Also Yitzhaki (1974) puzzle. PT can explain it, EU cannot.Also Yitzhaki (1974) puzzle. PT can explain it, EU cannot.

Liberalism versus paternalism debate.Liberalism versus paternalism debate.

The Exponential Discounting Model (DU)The Exponential Discounting Model (DU)

The DU model isThe DU model is

Samuelson (1936) had deep reservations: "It is completely Samuelson (1936) had deep reservations: "It is completely

arbitrary..”. He also implored economists NOT to use it for arbitrary..”. He also implored economists NOT to use it for

welfare analysis. The advice was ignored.welfare analysis. The advice was ignored.

Its popularity stems from the fact that it is the unique form of Its popularity stems from the fact that it is the unique form of

time discounting that makes choices time consistent.time discounting that makes choices time consistent.

0

Anomalies of the DU modelAnomalies of the DU model

The evidence against the DU model is serious and fatal. The evidence against the DU model is serious and fatal.

Example: Prefer two apples today to one tomorrow, but prefer 2 Example: Prefer two apples today to one tomorrow, but prefer 2

apples in 52 days to 1 apple in 51 days (Thaler, 1981). apples in 52 days to 1 apple in 51 days (Thaler, 1981).

Hyperbolic discounting (HD) easily explains this puzzle.Hyperbolic discounting (HD) easily explains this puzzle.

Evidence indicates that the following are more salient i.e. Evidence indicates that the following are more salient i.e.

discounted less: losses compared to gains, larger magnitudes.discounted less: losses compared to gains, larger magnitudes.

Preferences for increasing sequences (desserts at the end, Preferences for increasing sequences (desserts at the end,

increasing wage profiles)increasing wage profiles)

Hyperbolic Discounting and “Current Biased Preferences”Hyperbolic Discounting and “Current Biased Preferences”

Evidence: per period discount rate is decreasing over time.Evidence: per period discount rate is decreasing over time.

Simplest form is the quasi-hyperbolic form or form.Simplest form is the quasi-hyperbolic form or form.

Most general form of hyperbolic discounting is in L-P(QJE, 1993)Most general form of hyperbolic discounting is in L-P(QJE, 1993)

al-Nowaihi and Dhami provide the correct derivation (2006, MSS, Science al-Nowaihi and Dhami provide the correct derivation (2006, MSS, Science

Direct Top 25 paper)Direct Top 25 paper)

Creates an additional bias for current consumption. Also known as Creates an additional bias for current consumption. Also known as

present-biased preferencespresent-biased preferences..

This explains several puzzles in economicsThis explains several puzzles in economics

1,0

Some ApplicationsSome ApplicationsBias towards the presentBias towards the present leads to: leads to:

1. Procrastination.1. Procrastination.

2. Inadequacy of savings2. Inadequacy of savings

3. Sharp decline in consumption at retirement3. Sharp decline in consumption at retirement

4. Addictions that are hard to kick.4. Addictions that are hard to kick.

4. Investment in less liquid assets (e.g. housing) and 4. Investment in less liquid assets (e.g. housing) and simultaneously holding credit card debt (this requires simultaneously holding credit card debt (this requires using the model of multiple selves, which I surely will using the model of multiple selves, which I surely will not have time to tell you about)not have time to tell you about)

EMOTIONSEMOTIONS

Economics is about cold, calculated, emotionless, decisions.Economics is about cold, calculated, emotionless, decisions.

VISCERAL INFLUENCES (Lowenstein, 1996): intense physiological VISCERAL INFLUENCES (Lowenstein, 1996): intense physiological

states such as hunger, thirst, moods, emotions, craving for drugs.states such as hunger, thirst, moods, emotions, craving for drugs.

Humans can deal with moderate but not extreme visceral factors. Humans can deal with moderate but not extreme visceral factors.

1. Under the visceral influence of anger something might be said in a 1. Under the visceral influence of anger something might be said in a

business negotiation that is ruinous.business negotiation that is ruinous.

2. Interrogators use hunger, pain or extreme sleep deprivation to elicit 2. Interrogators use hunger, pain or extreme sleep deprivation to elicit

confessions.confessions.

3. As strike deadline approaches: around the clock negotiations 3. As strike deadline approaches: around the clock negotiations

invoking the visceral influence of sleep deprivation. Each side is invoking the visceral influence of sleep deprivation. Each side is

likely to make concessions under sleep deprivation.likely to make concessions under sleep deprivation.

4. We may buy things in a “hot state”. Thus, 21 day cooling off period.4. We may buy things in a “hot state”. Thus, 21 day cooling off period.

Micro-foundations of emotionsMicro-foundations of emotions Humans departed from apes (6m years). Evolution superimposed a Humans departed from apes (6m years). Evolution superimposed a

cognitive part (prefrontal cortex) on an earlier emotive part cognitive part (prefrontal cortex) on an earlier emotive part

(primitive mammalian brain or the limbic system). (primitive mammalian brain or the limbic system).

There is conflict between the two: the cognitive and the emotive There is conflict between the two: the cognitive and the emotive

parts. So, feeling in two minds, heart vs brain (Adam Smith).parts. So, feeling in two minds, heart vs brain (Adam Smith).

Loewenstein-O’Donoghue (2007) show many features (e.g. loss Loewenstein-O’Donoghue (2007) show many features (e.g. loss

aversion, fairness, hyperbolic discounting etc.) arise from a conflict aversion, fairness, hyperbolic discounting etc.) arise from a conflict

between the emotive and cognitive parts.between the emotive and cognitive parts.

Willpower and stress, Shiv and Fedorikhin (1999): number of digits Willpower and stress, Shiv and Fedorikhin (1999): number of digits

memorized and tempting snacks.memorized and tempting snacks.

McClure (2004): When subjects faced temptations then electrical McClure (2004): When subjects faced temptations then electrical

activity in the limbic system and when “logical” choices offered, activity in the limbic system and when “logical” choices offered,

then electrical activity was in the prefrontal cortex.then electrical activity was in the prefrontal cortex.

Framing and Mental AccountingFraming and Mental Accounting Neoclassical economics is immune to framing Neoclassical economics is immune to framing

effects. Marketing people know otherwise.effects. Marketing people know otherwise. K-T (1984): A disease is expected to kill 600 people. K-T (1984): A disease is expected to kill 600 people.

Physicians were posed the following two choices.Physicians were posed the following two choices.

Positive framingPositive framing: Program A (200 will be saved). : Program A (200 will be saved). Program B ( 1/3 probability that 600 will be saved). Program B ( 1/3 probability that 600 will be saved). Note that both programs are equally effective. Note that both programs are equally effective.

72% choose A (the LESS risky choice)72% choose A (the LESS risky choice)

Negative framingNegative framing: Program C (400 will die). : Program C (400 will die). Program D (2/3 probability that 600 die).Program D (2/3 probability that 600 die).Note that both programs are equally effective.Note that both programs are equally effective.

72% choose D (the MORE risky choice)72% choose D (the MORE risky choice)

Is Money fungible across accounts?Is Money fungible across accounts? Economics routinely sets the budget constraint Economics routinely sets the budget constraint

(expenditure = income). This is deceptive.(expenditure = income). This is deceptive. Humans code money into several accounts e.g. Humans code money into several accounts e.g.

children’s education account, book account. The MPC children’s education account, book account. The MPC differs across the accounts. We are rarely tempted to differs across the accounts. We are rarely tempted to touch e.g. the children’s account.touch e.g. the children’s account.

We are suspicious that we might use money unwisely in We are suspicious that we might use money unwisely in the future so we might put it children’s funds into an the future so we might put it children’s funds into an account that is more difficult to raid.account that is more difficult to raid.

The RED (debt) and BLACK (debt free) of mental The RED (debt) and BLACK (debt free) of mental accounts. Individuals derive satisfaction if they go from accounts. Individuals derive satisfaction if they go from red to black even if it does not make economic sense.red to black even if it does not make economic sense.

People sometimes prefer to pay by debit cards rather People sometimes prefer to pay by debit cards rather than credit cards, why? Ensures that they do not get than credit cards, why? Ensures that they do not get into debt.into debt.

Fast and Frugal Heuristics and bounded rationality. Fast and Frugal Heuristics and bounded rationality.

In economics choose actions by mathematical optimization.

In practice time/computational ability is very limited so we use a small number of fast and frugal heuristics e.g. “do not go into debt”, “recognition heuristic”.

This is continuation of the work of Herbert Simon.

The problem of catching a ball ( “gaze heuristic”).

ConclusionsConclusions BE arises from a basic methodology of respecting BE arises from a basic methodology of respecting

the evidence, as in the pure sciences.the evidence, as in the pure sciences. It is not arbitrary or ad-hoc.It is not arbitrary or ad-hoc. It is as rigorous as standard economics.It is as rigorous as standard economics. It explains all the things that standard economics It explains all the things that standard economics

does, but also explains many that standard does, but also explains many that standard economics cannot. This is the nature of scientific economics cannot. This is the nature of scientific progress.progress.

Perhaps in due course the prefix “behavioural” Perhaps in due course the prefix “behavioural” will drop out and we will recognize this as the will drop out and we will recognize this as the NEW standard economics.NEW standard economics.

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