Drawing from history and psychology, behavioral economics offers a radically different perspective to help us understand how people, organizations and markets really operate in comparison to the traditional economic models. Behavioral economics’ lens on human behavior posit that people are bound by biases they are largely unaware of, thus assuming that their behavior is based on rational economic decision-making processes. Much of the hypothesis testing governing behavioral economics is based on experiments carried out in controlled laboratory conditions. Some traditional economists argue that while the results of these experiments are interesting, they do not invalidate the rational models of traditional economics. Relegating behavioral economics to the fringes of economics, they cite the controlled nature of behavioral experiments carried out by psychologists as the reason why these experiments fail to take into account the most important regulator of perceived rational behavior, the large competitive marketplace.7
Another reason why psychological and social aspects of human behavior do not feature in economic theory is that theoretical economics developed rapidly in the 1950s. In its quest to be recognised as a science, economists simplified their models to make them more scientifically rigorous and mathematically treatable. At the time, psychology was an evolving discipline and was yet to branch into the economic domain of human behavior. Whatever the reasons, the near collapse of the world financial markets at the turn of this decade, and the admission by some of the most powerful players in politics, economics and global finance, that they were clueless about the pending economic disaster and what to do about it, has brought the debate about behavioral economics’ contribution to economic thought into the mainstream.
Via Emre Erdogan