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By Peter Diamond, Hannu Vartiainen

In the decade, behavioral economics, borrowing from psychology and sociology to provide an explanation for judgements inconsistent with conventional economics, has revolutionized the best way economists view the area. yet regardless of this basic good fortune, behavioral considering has essentially remodeled just one box of utilized economics-finance. Peter Diamond and Hannu Vartiainen's Behavioral Economics and Its Applications argues that behavioral economics could have an identical effect in different fields of economics.

during this quantity, a number of the world's major thinkers in behavioral economics and basic monetary conception make the case for a miles larger use of behavioral principles in six fields the place those principles have already proved precious yet haven't but been totally incorporated--public economics, improvement, legislation and economics, health and wellbeing, salary selection, and organizational economics. the result's an try and set the schedule of a big improvement in economics--an schedule that might curiosity policymakers, sociologists, and psychologists in addition to economists.

members comprise 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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18 B E HAV I O RA L P U B L I C E C O N O M I C S These additional data could facilitate more precise and reliable estimation of key structural parameters. One might, for example, use self-reported data on preferences along with choice data to estimate the parameters of a normative model. In principle, the normative model could even include parameters that do not appear in the positive model. Likewise, nonchoice data may prove useful in identifying circumstances in which choices reliably reflect preferences, and those in which they do not.

Moreover, in some cases, financial professionals rely on simple rules of thumb (Doyle and Johnson 1991), and even their relatively sophisticated tools conflict in some ways with sound life-cycle planning principles (Bernheim et al. 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.

Eating disorders, while not quite as extreme, provide another illustration. For the purpose of public policy, we probably should not proceed on the assumption that an anorexic’s refusal to eat is just an expression of valid preferences. On the contrary, we should and generally do regard this as dysfunctional. These examples are instructive because they suggest that, in some circumstances, it 15 C HA PT E R T W O is reasonable to use evidence of brain process malfunctions—something other than choice data—to trump the principle of revealed preference.

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