Behavioral Economics and Its Applications

Features

• Cover Type: Hard Cover with 336 pages
• Published by: Princeton University Press
• Edition: 1st Edition March 26, 2007
• Written in: English
• ISBN 10 Number: 0691122849
• ISBN 13 Number: 978-0691122847
• Book Dimensions: 9.2 x 6.1 x 1 inches
• Weighs: 1.3 pounds

Product Review
Diamond and Vartiainen offer an important, timely collection of essays on behavioral economicsThe authors' approach is refreshing in that they make clear they are not interested in defending behavioral economics against more traditional economics.
(H. Winter Choice )

Product Review
This is an great and important volume outlining cutting-edge developments in behavioral economics and its applications. It is coherent, substantive, and topical. Indeed, it could serve as a leading text or reader on behavioral economics.
(Geoffrey Hodgson, University of Hertfordshire, England )

Reader Reviews
This edited volume is the outgrowth of an international conference on the topic held in Helskini in June, 2004. Behavioral economics is moving so rapidly that the various contributions must serve as an introduction to policy areas, not a description of cutting edge research. I recommend this book to experts in the area because of its breadth (it covers six different policy-relevant fields), and to curious newcomers because each policy area is approached as though the reader knows the traditional theory but not the behavioral alternative. In some of the areas, the results are strong, whereas in others, little has been learned to date, but the potential for behavioral contributions is made clear by the author. The strongest chapter in the book, also the most focused, is Truman Bewley's study of the causes of wage rigidity over the business cycle. He concludes that firms are reluctant to lower wages when labor demand is weak, because directors believe that such a move would adversely affect "worker morale." The theoretical importance of this result is inestimable, since it implies that the culture of the workplace, ignored in standard economic theory, is an important determinant of profits and productivity. The policy implications are important as well, since this result suggests a dimension of macroeconomic stabilization not usually considered in standard economic theory. The review of behavioral public economics does a good job dealing with time inconsistency, addictive substances, and contributions to public goods. The discussion is somewhat dated on the first issue, since very explicit taxation and savings policies based on framing effects and time inconsistency have emerged in the past three years. The discussion of public goods deals with experiments, but not the large literature on private charity and voter behavior towards redistribution policy. Similarly, there is a nice behavioral literature on individual preferences concerning taxation that is not dealt with here. Among the more interesting contributions is a chapter on behavioral psychology and international poverty. The author argues that development policy should be based on the idea that the poor in poor countries have the same cognitive and behavioral limitations that behavioral economics has documented for the non-poor in rich countries. This is a refreshing alternative to the two standard notions that (a) the poor are Homo Economicus without wealth; and (b) the poor have behavioral characteristics, not shared by the nonpoor, that make them poor. Much more work has been done in this area since the Helskini conference. I direct the reader to a brillian review paper in the Journal of Economic Perspectives, Vol 21, No. 1, Winter 2007, pgs 141-167, by Duflo and Banerjee. The possible future impact of this work may well be very great. It is surprising that the editors chose not to include a chapter on behavioral finance. This research area is among the most active in behavioral economics, and potentially with the most important implications for regulatory policy. Of course, there are other fine books covering this area, but a summary chapter would have been useful for the reader. The inspiration for this book is the behavioral economics centering on how individuals make decisions. There is an additional area, which might be called behavioral game theory, which has discovered important behavioral regularities in human strategic interaction, that is virtually absent from this book. The standard view of the authors is that individuals are boundedly rational, loss averse, erratic decision-makers prone to error, and poor logicians subject to framing errors. The newer literature stresses the capacity of humans to behave in ways that enhance cooperation in complex societies. For instance, the issue of corruption is dealt with in only two pages, and the issue of when individual exhibit such character virtues as honestly, trustworthiness, and social commitment is barely touched upon.