Edward Cartwright - Behavioral Economics

Behavioral Economics

Over the last few decades behavioral economics has revolutionized the discipline. It has done so by putting the human back into economics, by recognizing that people sometimes make mistakes, care about others and are generally not as cold and calculating as economists have traditionally assumed. The results have been exciting and fascinating, and have fundamentally changed the way we look at economic behavior.

This textbook introduces all the key results and insights of behavioral economics to a student audience. Ideas such as mental accounting, prospect theory, present bias, inequality aversion and learning are explained in detail. These ideas are also applied in diverse settings such as auctions, stock market crashes, charitable donations and health care, to show why behavioral economics is crucial to understanding the world around us. Consideration is also given to what makes people happy, and how we can potentially nudge people to be happier.

This new edition contains expanded and updated coverage of contract theory, bargaining in the family, time and risk, and stochastic reference points, among other topics, to ensure that readers are kept up to speed with this fast-paced field. The companion website is also updated with a range of new questions and worked examples. This book remains the ideal introduction to behavioral economics for advanced undergraduate and graduate students.

Edward Cartwright is a Reader in Economics at the University of Kent, Canterbury, UK.

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Behavioral Economics

Third Edition

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Dedicated to Anna, Darren, Sofie, Kerry and Robert

Contents

The first edition of this book came about from teaching a course called Strategy and games for first-year undergraduates. The idea of the course was to illustrate through classroom experiments some of the basic ideas of economics and game theory. In teaching that course my interest and knowledge of behavioral economics grew a lot; as did my frustration at the limited resources available to students wanting to learn more about this fascinating area of economics. Eventually, I decided it was time to write a book.

My basic objective when writing the book was to convey both the excitement and the importance of behavioral economics. I wanted to explain the basic principles, ideas and results of behavioral economics and show how fascinating they are. I also wanted to illustrate through applications why behavioral economics is fundamentally important in understanding the world around us. Finally, I wanted a book that was accessible to a general reader, not just those trained in economics and comfortable with algebra.

This third edition builds on the previous two. Behavioral economics is an evolving subject, and so there is always new material to add and updates to take note of. There are, for example, new sections on stochastic reference points and the relationship between risk and time preferences. New applications are also considered, including behavioral contract theory and bargaining in the family.

This book would not have been possible without those who have contributed to the literature on behavioral economics and given me such great material to work with. Particular thanks are due to those who made my job so easy by writing papers over many years that, when put together as a whole, gave very clear insights into economic behavior. I would also like to extend a sincere thanks to very many people who have given me useful feedback on the first two editions of the book. It is important to make clear, though, that the opinions expressed in this book are mine, and not necessarily those of the researchers whose work I refer to.

A lot of thanks is due to my wife, Anna, who has helped so much in writing this and the earlier editions of the book. On a personal level, she has been patient and supportive while I wrote them. On a practical level, she is my greatest critic, never happy until everything is explained as fully and clearly as possible; she is also a great source of new ideas and new ways of thinking about old ideas. I should also thank all the students and colleagues connected with the Strategy and Games course, for teaching me so much. Finally, I want to give a big thanks to Myrna Wooders, who, as well as being a fantastic person to know, has long been, and continues to be, a great inspiration and mentor.