Psychology › Thinking, memory & biases
Behavioral economics
Since 1979· School or movement
Well replicatedStrong, repeated evidence.
Behavioral economics blends psychology into economics, studying how real people save, spend, invest and decide, not idealized rational agents.
See it on the Psychology map →What it says
Classical economics assumes consistent, self-interested calculators. From 1979, prospect theory and Richard Thaler's catalog of 'anomalies' documented systematic departures: losses loom larger than gains, people sort money into mental accounts, overweight the present and stick with defaults. The field brought economics Nobels to Kahneman (2002), Robert Shiller (2013) and Thaler (2017), and governments set up 'nudge units', starting with Britain's in 2010.
Why it matters
It changed retirement policy through automatic enrollment, explains investor mistakes and bubbles in behavioral finance, and shapes how firms price, market and design choices.
Think of it like
Like underwriting tenants on their actual payment history rather than on how a perfectly rational tenant would behave.
The evidence
Well established. Lab experiments, field trials and large records such as 401(k) data confirm core effects; some popular nudge results proved smaller than first reported.
Open questions
How large and lasting nudges are at scale: a 2022 study found government nudge trials averaged about a sixth of the effect reported in academic papers.
Inside this (6)
Connections (7)
▸Anchoring shapes negotiations studied in Behavioral economicsWell replicated
The connection
Behavioral economists use anchoring to explain why first offers, listing prices and suggested retail prices move final deals. In negotiation studies, the side making the first offer often ends closer to it. A 2003 study found arbitrary numbers, like Social Security digits, swayed what people would pay.
Who showed it and when
Northcraft and Neale's 1987 appraisal study with Tucson real-estate agents; Adam Galinsky and Thomas Mussweiler on first offers (2001); Dan Ariely and colleagues at MIT (2003).
The evidence
Lab negotiations, real-estate data, and field studies of prices and even judges' sentencing show anchors shifting outcomes.
Open questions
Arbitrary anchors like Social Security digits replicated weakly in 2014; anchors that look relevant, like asking prices, are much more robust.
▸Prospect theory is the founding theory of Behavioral economicsWell replicated
The connection
Prospect theory gave economists a precise alternative to expected-utility theory, the standard model of rational choice, in their own mathematical language and journal. Thaler used it to explain the endowment effect and mental accounting; later work applied it to stock returns, insurance and how hard people work.
Who showed it and when
Econometrica, 1979; taken up by Thaler from 1980, and by finance economists such as Shlomo Benartzi in the 1990s.
The evidence
It is among the most cited papers ever published in Econometrica, and founders of the field, Thaler included, credit it as their starting point.
Open questions
Some argue behavioral economics has several roots, including Herbert Simon and George Katona, so calling one paper 'founding' oversimplifies.
▸Richard Thaler helped found Behavioral economicsWell replicated
The connection
Thaler turned scattered oddities into a field. His 1980 paper 'Toward a Positive Theory of Consumer Choice' applied prospect theory to everyday spending; his 'Anomalies' columns from 1987 cataloged market puzzles; and he built networks and trained students who spread the approach through economics and finance.
Who showed it and when
Rochester in the 1970s, then Cornell and the University of Chicago; with Robert Shiller he ran a behavioral finance workshop at the National Bureau of Economic Research from 1991.
The evidence
His 2017 Nobel citation credits him with bringing psychology into economic analysis of decisions; his 1980 paper is widely cited as a founding text.
Open questions
Whether Thaler, Kahneman and Tversky, or earlier figures such as Herbert Simon best deserve the 'founder' title is a matter of emphasis.
▸Nudges and choice architecture apply Behavioral economicsWell replicated
The connection
Behavioral economics documents how real people depart from the rational model: inertia, present bias, loss aversion. Nudges turn those findings into tools. If people stick with defaults, make the default the good option; if they procrastinate, send a timely reminder; if they follow peers, tell them what neighbors do. It is the field's most visible policy use.
Who showed it and when
Popularized by Thaler and Sunstein's 2008 book; adopted by the UK government in 2010, the US government in 2015, and by many companies.
The evidence
Thousands of randomized trials test nudges directly; nudge units' records let economists Stefano DellaVigna and Elizabeth Linos measure real-world effects in 2022.
Open questions
Critics argue behavioral economics became too identified with small nudges, neglecting structural fixes; some leading researchers now urge 'system-level' changes instead.
▸Present bias (hyperbolic discounting) is modeled in Behavioral economicsWell replicated
The connection
Behavioral economists turned present bias into a simple formula, the 'beta-delta' model: any future reward gets one extra discount just for not being now. It predicts people who plan to start saving next month but never do, and explains why commitment devices and automatic enrollment work.
Who showed it and when
Edmund Phelps and Robert Pollak, 1968; popularized by David Laibson at Harvard (1997) and by Ted O'Donoghue and Matthew Rabin (1999).
The evidence
Field studies fit its predictions, such as gym members overpaying for unused memberships (2006) and higher saving with locked accounts in the Philippines (2006).
Open questions
Measured present bias is often small for money but larger for effort or food; whether the simple model captures real behavior is debated.
▸Asch conformity experiments help explain herding in Behavioral economicsMixed evidence
The connection
Asch showed people often go along with a group's obviously wrong answer. Economists and finance researchers cite such social pressure, alongside sensible copying of others' information, to explain herding: piling into hot stocks, bank runs and housing bubbles. How much is conformity versus inference is hard to separate.
Who showed it and when
Asch at Swarthmore College, 1951; herding models by Abhijit Banerjee and by Bikhchandani, Hirshleifer and Welch (both 1992); Robert Shiller's Irrational Exuberance (2000).
How solid is it?
Lab markets and fund-manager data show herding, but the link to Asch-style conformity is mostly inferred rather than directly tested, hence the mixed rating.
Open questions
Herding can be rational: copying others makes sense if they might know something, and many economic models explain it without any conformity pressure.
▸Money and happiness research overlaps with Behavioral economicsWell replicated
The connection
Behavioral economists study well-being directly, asking people how they feel, rather than assuming more money always means more satisfaction. Income-and-happiness research, from Richard Easterlin's 1974 paradox to Kahneman and Angus Deaton's 2010 analysis of 450,000 US survey responses, became shared ground for economists and psychologists.
Who showed it and when
Easterlin, 1974; Kahneman and Deaton at Princeton, 2010; Matthew Killingsworth's 2021 study and his 2023 joint revision with Kahneman and Barbara Mellers.
The evidence
The studies appear in leading economics and psychology journals, and 'happiness economics' is an established subfield with its own large survey data sets.
Open questions
Whether happiness levels off above some income, about $75,000 in the 2010 study, or keeps rising for most people is still being refined after 2023.