Behavioral economics

The behavioral economics ( English behavioral economics , also behavioral economics ) is a branch of economics . It deals with human behavior in economic situations. Constellations are examined in which people act contrary to the model assumption of the homo oeconomicus , i.e. the rational utility maximizer. Such questions are also mathematically investigated by game theory . The transition from behavioral economics to economic psychology is fluid.

Subdisciplines behavioral economics are the behavioral financial market theory (engl. Behavioral Finance ) which deals with the supposedly irrational behavior on financial and capital markets, and in some cases the behavioral policy (engl. Behavioral public policy ), if applied to economic contexts.

history

During the era of classical economics, there was a close connection between economic theory and psychology. For example, Adam Smith wrote an important text describing the psychological principles of individual behavior, The Theory of Moral Sentiments . Jeremy Bentham wrote extensively on the psychological foundations of utility. Economists only began to move away from psychology when they tried to establish their discipline as natural science during the era of neoclassical theory . Attempts have now been made to derive economic behavior from assumptions about the nature of economic agents. The concept of Homo oeconomicus was developed, and the psychology of this being was fundamentally based on reason. In spite of everything, psychology influenced the analysis of many important figures in the development of neoclassical theory, such as Francis Edgeworth , Vilfredo Pareto, and Irving Fisher .

By the middle of the 20th century, psychology had largely disappeared from the economic discussion. A multitude of factors contributed to their influence on economic decisions being taken up again and the theory of behavioral economics being developed. Models of expected usefulness and usefulness after deduction of costs ( discounted utility ) had previously been widely recognized by providing verifiable hypotheses taking into account uncertainty or interim consumption ( intertemporal consumption ) . A number of observed and repetitive anomalies challenged these hypotheses. Furthermore, in the 1960s, cognitive psychology began to view the brain as an information processing machine, in contrast to models of behaviorism . As a result, psychologists in this field such as Ward Edwards, Amos Tversky and Daniel Kahneman began to test their cognitive models of the decision-making process under risk and uncertainty on economic models of reasonable behavior.

Perhaps the most important essay in developing the discipline of behavioral finance and behavioral economics was written by Kahneman and Tversky in 1979. This paper, called Prospect Theory: An Analysis of Decision under Risk, used cognitive psychological techniques to explain a number of documented anomalies in making sound economic decisions. Other significant steps on the way to developing the discipline were a well-attended and eclectic conference at the University of Chicago and a 1997 special edition of the acclaimed Quarterly Journal of Economics in memory of Amos Tversky, who dealt with the subject of behavioral economics .

The first Nobel Prize for Behavioral Economics was awarded equally to Daniel Kahneman and Vernon Smith in 2002. Previously, Reinhard Selten , the German behavioral economist and founder of the laboratory for experimental economic research at the University of Bonn , received the Nobel Prize for his contribution to game theory. In 2017 Richard Thaler was awarded the Nobel Prize for his contribution to behavioral economics.

General

The basic theory of household theory in microeconomics examines economic decisions made by, mostly private, households . This theory is subject to strong assumptions that do not always correspond to reality. These would include:

Consumers clearly prefer some goods over other goods.

Consumers are subject to budget constraints.

Given their preferences, their limited income, and their given prices, consumers choose various combinations of goods that maximize their satisfaction, and hence their utility .

However, preferences are not always clear, they can change depending on the context of the decision-making process, for example unfair prices play a role. In addition, consumer decisions are not always benefit-maximizing. To maximize the benefits, it would be not to tip, but this happens every day. By making more realistic and detailed assumptions about human behavior, one can gain a better understanding of consumer demand using insights from psychology and sociology. This is the goal of behavioral economics.

Crucial observations

There are three main themes in behavioral finance and economics theory

Heuristics : People often make decisions based on a simple, fast and stable rule of thumb , not just an analysis of all possibilities or an exact calculation of various probabilities . One explanation for this behavior would be when people are asked to assess the probabilities of an outcome, they actually judge something else, but not the probability itself. They just believe that they have assessed the probability asked. Heuristics are therefore a simple procedure to find adequate, albeit often imperfect, answers to difficult questions. They can lead to cognitive biases in people's judgment. Many of these biases have been studied, see List of Cognitive Biases .

Classification ( English framing ): The way in which a problem or a decision is presented influences the action of the decider.
Imperfect markets ( market inefficiencies ): Attempts to explain observed market acts contrary to the reasonable expectations and market efficiency. These include incorrect pricing, unreasonable decisions, and profit anomalies. Particularly Richard Thaler has described in a number of articles specific market anomalies from the perspective of behaviorism.

Market-wide anomalies cannot generally be explained about individuals suffering from certain prejudices in thinking. Individual biases often do not have enough influence to change market prices and profits. In addition, individual prejudices can neutralize each other. Cognitive biases have truly unusual effects only when there is social contamination with a very emotional content, such as general greed or general panic. These then lead to widespread phenomena such as herd behavior and groupthink . Behavioral economics is based as much on social psychology as it is on individual psychology.

There are two exceptions to this general statement. First of all, there may be so many individuals exhibiting biased behavior - that is, behavior that deviates from reasonable expectations - that this behavior is the norm and thus has market-wide implications. Furthermore, some behavioristic models have explicitly shown that a small but significant group can produce market-wide effects (see e.g. Fehr and Schmidt, 1999).

Even George Akerlof and Robert Shiller try in her book Animal Spirits make fruitful behavioral economics for macroeconomic Keynesian economic theory knowledge.

Methods

In the beginning, behavioral economics theories were developed almost exclusively through experimental observations and responses to surveys. More recently, real world data has also grown in importance . The functional magnetic resonance imaging (fMRI) was used to find out which brain areas are used in the various steps of economic decision-making. Experiments that simulate market situations such as stock market trading and auctions were found to be particularly useful because they allow one to isolate the effects of a particular bias on behavior; the market behavior observed can typically be explained in various ways. Carefully developed experiments can help narrow down the number of understandable explanations. The experiments are designed to create comparable incentives, with binding transactions using real money being the norm.

Differentiation from economic psychology

See the delimitation in Economic Psychology .

Critique of the theory of behavioral economics

Critics of behavioral economics typically emphasize the rationality of economic agents (see Myagkov and Plott (1997), among others). They claim that behavior observed experimentally cannot be transferred to market situations because learning opportunities and competition will ensure that at least a broad approximation of reasonable behavior will occur. Others note that cognitive theories like Prospect Theory are only models of decision-making, not generalizable economic behavior, and therefore only apply to the one-off decision problems that are presented to participants in experiments or surveys.

Traditional economists are also skeptical about the techniques used in experiments and surveys that play a major role in behavioral economics . Economists emphasize the importance of actual preferences as opposed to the “preferences indicated” in surveys in order to determine an economic value. Experiments and surveys must be carefully prepared to systemic biases, strategic behavior and lack of Anreizvergleichbarkeit ( lack of incentive compatibility ) to be avoided. Many economists, because of the difficulty in ruling out these possibilities, distrust the results obtained in this way. Rabin (1998) rejects these criticisms, arguing that the results can be simulated in different situations and countries and that they lead to good empirical confirmations of the theoretical models.

Behavioral finance critics , such as Eugene Fama , mostly support the theory of the perfect market . They claim that behavioral finance is a collection of anomalies rather than a real branch of financial theory, and that these anomalies will at some point be priced out of the market or explained on the basis of arguments about the microstructures of the market. However, a distinction should be made between individual and social biases; The former can be offset by the market, while the other can create feedback that further and further removes the market from the "fair price". The subprime crisis in 2008, which was based on a speculative bubble in the US real estate market , showed how far the theories based on the assumption of “perfect markets” had deviated from reality . In general, speculative bubbles can hardly be explained in the models that assume rationality, but have occurred repeatedly throughout history.

A particular example of this criticism can be found in some attempts to explain the equity premium riddle. It is argued that the puzzle arises from the fact that barriers to entry (both practical and psychological) previously prevented individuals from entering the securities market. Accordingly, the difference in profits made between stocks and bonds will diminish over time as electronic means make stock trading accessible to a greater number of traders. Others respond that many personal investment funds are managed by pension funds, so the effect of these supposed barriers would be small. In addition, professional investors and fund managers appear to hold more bonds than one would think given the long-term earnings differentials.

literature

Primary literature

German-language books

Hanno Beck : Behavioral Economics. An introduction . Springer Gabler, 2014, ISBN 978-3-658-03367-5 .

Rolf J. Daxhammer, Máté Facsar: Behavioral Finance UVK Verlagsgesellschaft / UTB, Munich 2012, ISBN 978-3-8252-8504-3 .

Joachim Goldberg , Rüdiger von Nitzsch: Behavioral Finance. FinanzBook-Verlag, 1999.

Bernhard Jünemann , Dirk Schellenberg (ed.): Psychology for stock market professionals. The power of emotions in investing. Schäffer Poeschel.

Arnold Kitzmann: mass psychology of the stock exchange. Expectations and feelings determine the course of the course. Gabler, 2009.

Nils Kottke: Decision-making and investment behavior of private investors. Gabler, 2005.

Raimund Schriek: Better with Behavioral Finance: Financial Psychology in Theory and Practice. FinanzBook-Verlag, 2009.

English language books

Michael Pompian: Behavioral Finance and Wealth Management. How to built optimal portfolios that account for investor biases. Wiley Finance, 2006.
Hersh Shefrin : Beyond Greed and Fear: Understanding behavioral finance and the psychology of investing. Oxford University Press, 2007.
Andrei Shleifer : Inefficient Markets: An Introduction to Behavioral Finance. Oxford University Press, 1999.
Richard Thaler : The Winner's Curse: Paradoxes and anomalies of economic life. Princeton University Press, 1994.
Richard Thaler (Ed.): Advances in Behavioral Finance. Volume I, Russell Sage Foundation, 1993; Volume II, Princeton University Press, 2005.

Scientific essays

Daniel Kahneman , JL Knetsch, Richard Thaler: Anomalies: The endowment effect, loss aversion, and status quo bias. In: The Journal of Economic Perspectives. Volume 5, 1991, pp. 193-206.
Daniel Kahneman, Amos Tversky : Prospect theory: An analysis of decision under risk. In: Econometrica. Volume 47, 1979, pp. 263-292.
Daniel Kahneman, Amos Tversky: Choices, Values and Frames. Cambridge University Press, 2000.
Matthew Rabin : Psychology and Economics. In: Journal of Economic Literature. Volume 36, 1998, pp. 11-46.
Amos Tversky, Daniel Kahneman: Judgment under uncertainty: Heuristics and biases. In: Science. Volume 185, 1974, pp. 1124-1131.
Amos Tversky, Daniel Kahneman: The framing of decisions and the psychology of choice. In: Science. Volume 211, 1981, pp. 453-458.

Secondary literature

Floris Heukelom: Behavioral Economics. A history . Cambridge 2014.
Rüdiger Graf: "Heuristics and Biases" as a source and an idea. Behavioral economic research in contemporary history. In: Contemporary historical research . 12, 2015, pp. 511-519.

Web links

behavioralfinance.net , website with literature and numerous references and quotations (English).

swell

↑ Karl-Erik Wärneryd: Economic Psychology as a Field of Study . In: Handbook of Economic Psychology . Springer Netherlands, Dordrecht 1988, ISBN 90-481-8310-3 , pp. 2–41 , doi : 10.1007 / 978-94-015-7791-5_1 ( springer.com [accessed November 12, 2018]).
↑ WF Van Raaij, GM van Veldhoven, KE Wärneryd: Handbook of Economic Psychology . Springer Science & Business Media, 2013, ISBN 978-94-015-7791-5 ( google.de [accessed November 12, 2018]).
↑ Robert Pindyck, Daniel Rubinfeld: Mikroökonmie . Translated from the English by Anke Kruppa, Peggy Lötz-Steger. 7th edition. Pearson Germany, Munich 2009, ISBN 978-3-8273-7282-6 , pp. 251-252.
↑ Hersh Shefrin : Beyond Greed and Fear: Understanding behavioral finance and the psychology of investing. Oxford University Press, 2002.
↑ Daniel Kahneman : Fast thinking, slow thinking . From the English by Thorsten Schmidt. 3. Edition. Siedler Verlag, Munich 2011, ISBN 978-3-328-10034-8 , p. 127 f.
^ Hanno Beck : Behavioral Economics: an introduction. Springer Gabler, Wiesbaden 2014, ISBN 978-3-658-03366-8 , pp. 25-28.
↑ E. Fehr, KM Schmidt: A theory of fairness, competition, and cooperation. In: The Quarterly Journal of Economics. 114, 1999, pp. 817-868. doi: 10.1162 / 003355399556151 .
↑ George Akerlof, Robert Shiller: Animal Spirits. How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton 2009, p. Xi.

[1] Karl-Erik Wärneryd: Economic Psychology as a Field of Study . In: Handbook of Economic Psychology . Springer Netherlands, Dordrecht 1988, ISBN 90-481-8310-3 , pp. 2–41 , doi : 10.1007 / 978-94-015-7791-5_1 ( springer.com [accessed November 12, 2018]).

[2] WF Van Raaij, GM van Veldhoven, KE Wärneryd: Handbook of Economic Psychology . Springer Science & Business Media, 2013, ISBN 978-94-015-7791-5 ( google.de [accessed November 12, 2018]).

[Pindyck_und_Rubinfeld-3] Robert Pindyck, Daniel Rubinfeld: Mikroökonmie . Translated from the English by Anke Kruppa, Peggy Lötz-Steger. 7th edition. Pearson Germany, Munich 2009, ISBN 978-3-8273-7282-6 , pp. 251-252.

[4] Hersh Shefrin : Beyond Greed and Fear: Understanding behavioral finance and the psychology of investing. Oxford University Press, 2002.

[Kahneman2011-5] Daniel Kahneman : Fast thinking, slow thinking . From the English by Thorsten Schmidt. 3. Edition. Siedler Verlag, Munich 2011, ISBN 978-3-328-10034-8 , p. 127 f.

[Beck-6] Hanno Beck : Behavioral Economics: an introduction. Springer Gabler, Wiesbaden 2014, ISBN 978-3-658-03366-8 , pp. 25-28.

[7] E. Fehr, KM Schmidt: A theory of fairness, competition, and cooperation. In: The Quarterly Journal of Economics. 114, 1999, pp. 817-868. doi: 10.1162 / 003355399556151 .

[8] George Akerlof, Robert Shiller: Animal Spirits. How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton 2009, p. Xi.