Behavioral Economics and Game Theory

INTRODUCTION

Behavioral Economics

“At the core of behavioral economics is the conviction that increasing the realism of the psychological underpinnings of economic analysis will improve economics on its own terms -- generating theoretical insights, making better predictions of field phenomena, and suggesting better policy.” --Colin F. Camerer, Behavioral Economics: Past, Present, Future

Traditional economists adhere to Homo economicus and believe that all humans are rational actors who make decisions based on their own well being. Although this belief if convenient for economic modeling, there is evidence that suggests otherwise. Behavioral economics is a discipline which tries to understand and model human decision making through cognitive-psychology. This field is primarily concerned with the bounded rationality of economics agents, and why and how they make decisions. Although homo economicus serves as a coherent framework to model human behavior, behavioral economists argue that actual human behavior deviates from this rational model in predictable way and by incorporating these features into economic models, it would improve our ability to explain observed behavior (Levitt and List).

Game Theory