- Email: [email protected]
The foundations of behavioral economic analysis
Journal of Behavioral and Experimental Economics 67 (2017) 161–162
Contents lists available at ScienceDirect
Journal of Behavioral and Experimental Economics journal homepage: www.elsevier.com/locate/jbee
Book Review The foundations of behavioral economic analysis Behavioral economics seems to have turned into a mainstream area of economics. General interest journals in economics routinely publish behavioral research, Behavioral insights teams aka “nudge units” have popped up in several dozen countries by now, and behavioral economists even seem to be the new normal for the presidents of the American Economic Association: Richard Thaler is the outgoing, Robert Shiller is the current, and Al Roth the incoming president at the time of writing. It is therefore time to consolidate the field, and Sanjit Dhami’s book does so masterfully. According to the author the book serves several purposes. It is a (p. 21) “course text for advanced students in economics and other social sciences, a research handbook for behavioral economists, and an invitation to economists and other social scientists of all persuasions to explore this exciting new field.” With almost 1800 (!) pages, the book covers vast ground in 23 chapters and 9 parts and is far too broad in coverage and rich in detail that I can do justice to this excellent volume in this short review. Instead of covering all chapters superficially, let me give you a flavor of how Dhami proceeds by picking out a single part. Part 2 is on other-regarding preferences and it illustrates very well the general perspective of the book which, broadly speaking, is that science prospers in a fruitful dialogue between theory and empirics. This perspective is reflected in the organization of the book (p. 22): “A neoclassical theory is outlined, followed by a review of the evidence for it. If the weight of the evidence is inconsistent with the theory, then the behavioral alternatives and the evidence for or against them is described.” This approach is of course the dominant view among experimental economists (see e.g. part 2 in Fréchette and Schotter 2015) but it unfortunately has not permeated all camps within the profession. And such an approach is particularly important when dealing with other-regarding preferences since economists have been reluctant to admit “utility function fumbling” ever since Stigler and Becker (1977) for fear of a “proliferation of ad-hoc models with preferences tailored to explain every possibly situation. However, research in behavioral economics has provided a solid foundation based on extensive experimental evidence, to propose models of other-regarding preferences. This is not ad hoc …” (p. 341). The first chapter in part 2 lays out the “evidence on human sociality” with reference to dictator and ultimatum games, public goods, trust and gift-exchange games. The author bolsters the rather bold claim to “that lab evidence is representative of realworld human behavior …” (p. 343) by citing a number of remarkable studies. The chapter on evidence is followed by “models of other-regarding preferences” . In terms of the ground covered and the level of depth of treatment, the two chapters in Dhami need not fear any comparison with the excellent Chapter 4 by David Cooper and John Kagel in the Handbook of Experimental Economics (Kagel and Roth, 2015). I would say that Dhami provides even greater detail with respect to the theory, and he is more upto-date with the rapidly expanding literature in this field. In addition, there are materials covered in part 2 that are not covered in http://dx.doi.org/10.1016/j.socec.2017.01.006
the said handbook chapter. There is a chapter on “human morality and social identity” covering topics such as (p. 453) “the desire to be honest, to keep promises, to avoid deception and lies, and to be fair to one’s fellow human beings”, followed by a chapter on “incentives and other-regarding preferences” . This chapter provides a deep discussion of a wealth of interesting topics such as the implications of inequity aversion for optimal wage schemes and for the choice among alternative forms of compensation such as team incentives, relative performance evaluation and independent contracts. The chapter also discusses the efficiency of complete contracts (that come with intense monitoring) vs. incomplete contracts (which award agents more leeway and trust), the choice of organizational forms in the presence of the hold-up problem and the behavioral reasons for vertical integration. The chapter closes with an insightful discussion of intrinsic vs. extrinsic motivation, the implications of the desire of agents for autonomy and independence and the problem of moral disengagement of employees in a firm. With more than 200 pages, part 2 is an excellent, deep and thorough survey of the relevant literature on other-regarding preferences. It is well embedded in behavioral economic theory, ties very well with up-to-date literature, and discusses interesting applications. I think this is a must-read for any researcher in behavioral economics as it is the best survey available on the topic to date. But it is more than a long handbook chapter, it is clearly suitable as a textbook for advanced students. The book lays out the foundations of behavioral economics in an encompassing way and takes the student to the research frontiers. The writing is clear, lucid, and to the point. The chapters are followed by exercises that provide some food for thought. What else is in the book? Essentially anything the typical behavioral economist could think of plus some perhaps unexpected chapters. The usual suspects include behavioral perspectives on individual decision making under risk, uncertainty and ambiguity; time discounting; game theory; emotions; bounded rationality. Perhaps predictably, the book includes a part on neuroeconomics which is a useful entry to the topic but not nearly as detailed as textbook-length treatment (e.g. Fehr and Glimcher 2013). Dhami also covers “behavioral welfare economics” skillfully and with much circumspection. The topic is difficult and intriguing because “in the presence of biases and misperceptions, individuals can no longer be considered to be making informed judgments on their welfare. This calls for a modification of the methods of neoclassical welfare economics, because classical revealed preference analysis does not apply.” (p. 1577). Some readers will be surprised to find a fairly extensive coverage of evolutionary game theory and of “social dynamics” . These chapters are more difficult to read and hence might be less adequate for undergraduate teaching as they require some understanding of technically demanding materials (e.g. the stability of a system of differential equations or perturbed Markov chains). The one thing that readers might be missing in this otherwise admirably complete book is behavioral macroeconomics (to be sure, the fascinating topic of nominal inertia is discussed. For a survey on experimental approaches to
162
Book Review / Journal of Behavioral and Experimental Economics 67 (2017) 161–162
macroeconomics see Duffy 2015). And given my personal inclinations, I would have wished for a more concentrated perspective on behavioral public economics and political economy. To be sure, there are several applications to public economics (e.g. taxation and welfare) and political economy (in Ch. 6) scattered throughout the volume but a separate and condensed treatment of a “field” as in the excellent chapter 21 on financial markets would have been great. Another suggestion for the next edition would be to split the opus in two (or more) volumes. With 1800 pages, the book is now almost too bulky and heavy for students to carry around. Sanjit Dhami has spent more than 10 years on the monumental task to lay out the foundations of behavioral economics. The result is a major achievement. The book provides a comprehensive and encompassing survey and I think it will shape how the next generation of researchers thinks about the field. Overall, this is an excellent book that can be commended to advanced students of behavioral economics and to non-behavioral economists who are looking for an entry point into the field. It will also serve researchers in behavioral economics as an authoritative reference book. It is a must-have for anyone with a serious interest in the field.
References Cooper, D.J., Kagel, J.H., 2015. Other-regarding preferences. A selective survey of experimental results. In: Kagel, J.H., Roth, A.E. (Eds.). In: The Handbook of Experimental Economics, 2. Princeton University Press, pp. 217–289. Duffy, J., 2015. Macroeconomics: a survey of laboratory research. In: Kagel, J.H., Roth, A.E. (Eds.). In: The Handbook of Experimental Economics, 2. Princeton University Press, pp. 1–90. Fehr, E., Glimcher, P.W., 2013. Neuroeconomics, 2nd Edition Elsevier. Fréchette, G.R., Andrew, S. (Eds.) 2015. Handbook of Experimental Economic Methodology. Oxford Univ. Press. Part 2: Economic Theory and Experimental Economics Stigler, G.J., Becker, G.S., 1977. De gustibus non est disputandum. Am. Econ. Rev. 67 (2), 76–90.
Jean-Robert Tyran University of Vienna, Department of Economics, Oskar-Morgenstern-Platz 1, A-1090 Vienna, Austria E-mail address: [email protected] Received 16 January 2017 Accepted 16 January 2017 Available online 18 January 2017
Contents lists available at ScienceDirect
Journal of Behavioral and Experimental Economics journal homepage: www.elsevier.com/locate/jbee
Book Review The foundations of behavioral economic analysis Behavioral economics seems to have turned into a mainstream area of economics. General interest journals in economics routinely publish behavioral research, Behavioral insights teams aka “nudge units” have popped up in several dozen countries by now, and behavioral economists even seem to be the new normal for the presidents of the American Economic Association: Richard Thaler is the outgoing, Robert Shiller is the current, and Al Roth the incoming president at the time of writing. It is therefore time to consolidate the field, and Sanjit Dhami’s book does so masterfully. According to the author the book serves several purposes. It is a (p. 21) “course text for advanced students in economics and other social sciences, a research handbook for behavioral economists, and an invitation to economists and other social scientists of all persuasions to explore this exciting new field.” With almost 1800 (!) pages, the book covers vast ground in 23 chapters and 9 parts and is far too broad in coverage and rich in detail that I can do justice to this excellent volume in this short review. Instead of covering all chapters superficially, let me give you a flavor of how Dhami proceeds by picking out a single part. Part 2 is on other-regarding preferences and it illustrates very well the general perspective of the book which, broadly speaking, is that science prospers in a fruitful dialogue between theory and empirics. This perspective is reflected in the organization of the book (p. 22): “A neoclassical theory is outlined, followed by a review of the evidence for it. If the weight of the evidence is inconsistent with the theory, then the behavioral alternatives and the evidence for or against them is described.” This approach is of course the dominant view among experimental economists (see e.g. part 2 in Fréchette and Schotter 2015) but it unfortunately has not permeated all camps within the profession. And such an approach is particularly important when dealing with other-regarding preferences since economists have been reluctant to admit “utility function fumbling” ever since Stigler and Becker (1977) for fear of a “proliferation of ad-hoc models with preferences tailored to explain every possibly situation. However, research in behavioral economics has provided a solid foundation based on extensive experimental evidence, to propose models of other-regarding preferences. This is not ad hoc …” (p. 341). The first chapter in part 2 lays out the “evidence on human sociality” with reference to dictator and ultimatum games, public goods, trust and gift-exchange games. The author bolsters the rather bold claim to “that lab evidence is representative of realworld human behavior …” (p. 343) by citing a number of remarkable studies. The chapter on evidence is followed by “models of other-regarding preferences” . In terms of the ground covered and the level of depth of treatment, the two chapters in Dhami need not fear any comparison with the excellent Chapter 4 by David Cooper and John Kagel in the Handbook of Experimental Economics (Kagel and Roth, 2015). I would say that Dhami provides even greater detail with respect to the theory, and he is more upto-date with the rapidly expanding literature in this field. In addition, there are materials covered in part 2 that are not covered in http://dx.doi.org/10.1016/j.socec.2017.01.006
the said handbook chapter. There is a chapter on “human morality and social identity” covering topics such as (p. 453) “the desire to be honest, to keep promises, to avoid deception and lies, and to be fair to one’s fellow human beings”, followed by a chapter on “incentives and other-regarding preferences” . This chapter provides a deep discussion of a wealth of interesting topics such as the implications of inequity aversion for optimal wage schemes and for the choice among alternative forms of compensation such as team incentives, relative performance evaluation and independent contracts. The chapter also discusses the efficiency of complete contracts (that come with intense monitoring) vs. incomplete contracts (which award agents more leeway and trust), the choice of organizational forms in the presence of the hold-up problem and the behavioral reasons for vertical integration. The chapter closes with an insightful discussion of intrinsic vs. extrinsic motivation, the implications of the desire of agents for autonomy and independence and the problem of moral disengagement of employees in a firm. With more than 200 pages, part 2 is an excellent, deep and thorough survey of the relevant literature on other-regarding preferences. It is well embedded in behavioral economic theory, ties very well with up-to-date literature, and discusses interesting applications. I think this is a must-read for any researcher in behavioral economics as it is the best survey available on the topic to date. But it is more than a long handbook chapter, it is clearly suitable as a textbook for advanced students. The book lays out the foundations of behavioral economics in an encompassing way and takes the student to the research frontiers. The writing is clear, lucid, and to the point. The chapters are followed by exercises that provide some food for thought. What else is in the book? Essentially anything the typical behavioral economist could think of plus some perhaps unexpected chapters. The usual suspects include behavioral perspectives on individual decision making under risk, uncertainty and ambiguity; time discounting; game theory; emotions; bounded rationality. Perhaps predictably, the book includes a part on neuroeconomics which is a useful entry to the topic but not nearly as detailed as textbook-length treatment (e.g. Fehr and Glimcher 2013). Dhami also covers “behavioral welfare economics” skillfully and with much circumspection. The topic is difficult and intriguing because “in the presence of biases and misperceptions, individuals can no longer be considered to be making informed judgments on their welfare. This calls for a modification of the methods of neoclassical welfare economics, because classical revealed preference analysis does not apply.” (p. 1577). Some readers will be surprised to find a fairly extensive coverage of evolutionary game theory and of “social dynamics” . These chapters are more difficult to read and hence might be less adequate for undergraduate teaching as they require some understanding of technically demanding materials (e.g. the stability of a system of differential equations or perturbed Markov chains). The one thing that readers might be missing in this otherwise admirably complete book is behavioral macroeconomics (to be sure, the fascinating topic of nominal inertia is discussed. For a survey on experimental approaches to
162
Book Review / Journal of Behavioral and Experimental Economics 67 (2017) 161–162
macroeconomics see Duffy 2015). And given my personal inclinations, I would have wished for a more concentrated perspective on behavioral public economics and political economy. To be sure, there are several applications to public economics (e.g. taxation and welfare) and political economy (in Ch. 6) scattered throughout the volume but a separate and condensed treatment of a “field” as in the excellent chapter 21 on financial markets would have been great. Another suggestion for the next edition would be to split the opus in two (or more) volumes. With 1800 pages, the book is now almost too bulky and heavy for students to carry around. Sanjit Dhami has spent more than 10 years on the monumental task to lay out the foundations of behavioral economics. The result is a major achievement. The book provides a comprehensive and encompassing survey and I think it will shape how the next generation of researchers thinks about the field. Overall, this is an excellent book that can be commended to advanced students of behavioral economics and to non-behavioral economists who are looking for an entry point into the field. It will also serve researchers in behavioral economics as an authoritative reference book. It is a must-have for anyone with a serious interest in the field.
References Cooper, D.J., Kagel, J.H., 2015. Other-regarding preferences. A selective survey of experimental results. In: Kagel, J.H., Roth, A.E. (Eds.). In: The Handbook of Experimental Economics, 2. Princeton University Press, pp. 217–289. Duffy, J., 2015. Macroeconomics: a survey of laboratory research. In: Kagel, J.H., Roth, A.E. (Eds.). In: The Handbook of Experimental Economics, 2. Princeton University Press, pp. 1–90. Fehr, E., Glimcher, P.W., 2013. Neuroeconomics, 2nd Edition Elsevier. Fréchette, G.R., Andrew, S. (Eds.) 2015. Handbook of Experimental Economic Methodology. Oxford Univ. Press. Part 2: Economic Theory and Experimental Economics Stigler, G.J., Becker, G.S., 1977. De gustibus non est disputandum. Am. Econ. Rev. 67 (2), 76–90.
Jean-Robert Tyran University of Vienna, Department of Economics, Oskar-Morgenstern-Platz 1, A-1090 Vienna, Austria E-mail address: [email protected] Received 16 January 2017 Accepted 16 January 2017 Available online 18 January 2017