Behavioral economics and its applications by Peter Diamond, Hannu Vartiainen

By Peter Diamond, Hannu Vartiainen

Within the final decade, behavioral economics, borrowing from psychology and sociology to give an explanation for judgements inconsistent with conventional economics, has revolutionized the best way economists view the realm. yet regardless of this normal good fortune, behavioral considering has essentially remodeled just one box of utilized economics-finance. Peter Diamond and Hannu Vartiainen's Behavioral Economics and Its functions argues that behavioral economics could have an identical effect in different fields of economics. during this quantity, many of the world's top thinkers in behavioral economics and normal financial thought make the case for a miles larger use of behavioral principles in six fields the place those rules have already proved beneficial yet haven't but been absolutely incorporated--public economics, improvement, legislation and economics, overall healthiness, salary choice, and organizational economics. the result's an try and set the time table of a major improvement in economics--an time table that might curiosity policymakers, sociologists, and psychologists in addition to economists. members contain Ian Ayres, B. Douglas Bernheim, Truman F. Bewley, Colin F. Camerer, Anne Case, Michael D. Cohen, Peter Diamond, Christoph Engel, Richard G. Frank, Jacob Glazer, Seppo Honkapohja, Christine Jolls, Botond Koszegi, Ulrike Malmendier, Sendhil Mullainathan, Antonio Rangel, Emmanuel Saez, Eldar Shafir, Sir Nicholas Stern, Jean Tirole, Hannu Vartiainen, and Timothy D. Wilson.

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In a typical experiment, a subject (often a child) is placed in a room and is offered a choice between an inferior and a superior prize (one or two pieces of candy). Subjects can obtain the inferior prize at any time by calling the experimenter, but must wait until he returns to obtain the superior prize. In practice, the child’s ability to wait depends crucially on whether the inferior prize is visible. Merely covering the object significantly enhances self-control. More generally, in Mischel’s experiments, the deployment of attention emerges as a key determinant of self-control.

2002). Financial literacy is strongly related to behavior. Those who are less financially literate also tend to save less (Bernheim 1998). Moreover, measures designed to address financial illiteracy appear to have significant effects on choices. Policies mandating financial education for high school students result in higher asset accumulation once exposed students reach adulthood (Bernheim et al. 2001a). Likewise, financial education in the workplace increases participation in employee-directed pension plans and stimulates saving (see Bernheim and Garrett 2003; Bayer et al.

4 holds that choice and preferences do not diverge. Gul and Pesendorfer (2004a) defend this assumption as follows: Revealed-preference theory defines the interest of people to be what they do. Since there is no objective standard of self-interested behavior it is unclear what it would mean for an agent to act against his self-interest. Yet there are clearly situations where virtually everyone would agree that divergence does occur—where a choice is obviously not in someone’s interest. There are also situations in which most would agree that public policy should recognize these divergences.

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