Discussion of “BEHAVIORAL ECONOMICS”
“Behavioral Economics” (Collin Camerer) and
“Incentives and Self-control” (Matthew Rabin)
To appear in Advances in Economics and Econometrics
Theory and Applications, Ninth World Congress
School of Economics, Tel Aviv University and
Department of Economics, New York University
20 August 2005
I would like to thank Rani Spiegler for the many discussions we had on Behavioral
Economics during the last few years. I could not imagine writing this essay without the
benefit of his comments, insights, ideas and criticism.
1. What is the Behavioral Economics “Revolution”?
For me, economics is a collection of ideas and conventions which economists
accept and use to reason with. Namely, it is a culture. Behavioral economics
represents a transformation of that culture. Nonetheless, as pointed out by Camerer
and Loewenstein (2003), its methods are pretty much the same as those introduced
by the Game Theory revolution. At the core of most models in Behavioral Economics
there are still agents who maximize a preference relation over some space of
consequences and the solution in most cases still involves standard equilibrium
concepts. However, the behavioral economists are not committed to what is usually
referred to as rational motivations. An economic fable (or a model as we would call it)
that has at its core fairness, envy, present-bias and the like is by now not only
permitted but even preferred.
Why now? Perhaps, economists have finally realized that orthodox economic
models are too unrealistic and dogmatic. And perhaps it is the result of our constant
search for new directions in research. One might also ask why other ideas (such as
those of bounded rationality) are less welcome than those of Behavioral Economics. I
think that this is because the profession prefers progress in small steps. The models
of Behavioral Economics are not that different from those of applied economics and
thus are not perceived as a threat.
The extent of this transformation may