Psychology and Economics: Evidence from the Field

The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (1) nonstandard preferences, (2) nonstandard beliefs, and (3) nonstandard decision making. In, this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from charitable giving to labor supply. In the class of nonstandard preferences, I discuss time preferences (self-control problems), risk preferences (reference dependence), and social preferences. On nonstandard beliefs, I present evidence on over-confidence, on the law of small numbers, and on projection bias. Regarding nonstandard decision, making, I cover framing, limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors-firms, employers, CEOs, investors, and politicians-respond to the nonstandard behavior described in, the survey. Finally, I briefly discuss under what conditions experience and,market interactions limit the impact of the nonstandard features.