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Symposium 2015

Virtual Library File - Behavioral Economics: Past, Present, Future

The Challenge

Most human thinking is automatic, not deliberative. It is based on what effortlessly comes to mind. Human thinking is also socially conditioned.  Beliefs about what others are doing and expecting sha ...

Most human thinking is automatic, not deliberative. It is based on what effortlessly comes to mind. Human thinking is also socially conditioned.  Beliefs about what others are doing and expecting shape an individual’s own preferences. And humans don’t face situations as “tabula rasa,” but instead interpret situations against the backdrop of their own understandings shaped by culture and existing social patterns.

This chapter introduces the approach and methods of behavioral economics. Behavioral economics expands the economic analysis by providing it with more realistic psychological foundations of human decision-making. This way, new insights are generated that allow for better explanations of experimental and field phenomena, while suggesting more effective policies. The literature on probability judgment, revealed preferences, reference-dependence and loss aversion, preferences over risky and uncertain outcomes, intertemporal choices, time discounting, fairness and social preferences is discussed. The chapter ends with a summary of different application areas of behavioral economics for policy makers, including macroeconomics and savings, labor economics, and finance.