An Introduction to Behavioral Economics

Citation

Wilkinson, N., & Klaes, M. (2017). An Introduction to Behavioral Economics (3rd ed.). Bloomsbury Academic.

Chapter Summary

The third edition has eleven chapters in five parts and runs to about 600 pages. The publisher describes it as a comprehensive, rigorous and critical survey of the major topics in behavioral economics, with an interdisciplinary approach that brings in psychology, evolutionary biology and neuroscience, and aimed at higher undergraduate or Master's students.

Chapters 1–2: Nature of Behavioral Economics; Methodology

Part I, "Introduction", has a first chapter of about 26 pages on the nature of the field and a second of about 32 pages on its methodology. Together they define behavioral economics and explain how its evidence is gathered before any specific topic is taken up.

Chapters 3–6: Values, Preferences and Choices; Beliefs and Expectations; Decision-Making under Risk and Uncertainty; Mental Accounting

Part II, "Foundations", is the longest part and covers the building blocks of individual decision-making: values, preferences and choices; beliefs and expectations; choice under risk and uncertainty; and mental accounting. Chapter 5, at about 69 pages, is the longest in this part.

Chapters 7–8: The Discounted Utility Model; Alternative Intertemporal Choice Models

Part III, "Intertemporal Choice", first presents the discounted utility model, in a short chapter of about 22 pages, and then devotes a longer chapter of about 59 pages to alternative models of choice over time.

Chapters 9–10: Behavioral Game Theory; Social Preferences

Part IV, "Strategic Interaction", turns to settings where outcomes depend on others. Chapter 9 treats behavioral game theory, and Chapter 10, at about 73 pages the longest in the book, covers social preferences.

Chapter 11: Behavioral Economics: Summary and Outlook

Part V, "Conclusion", consists of a single chapter of about 43 pages that summarises the field and looks ahead.

Key Concepts

Introduction and Foundations (Chapters 1–6)

• Behavioral economics: the study of economic decisions informed by evidence from psychology and related fields, as set out in Chapter 1.
• Preferences and beliefs: the values, choices, beliefs and expectations on which individual decisions rest.
• Decision-making under risk and uncertainty: how people choose when outcomes are not certain.
• Mental accounting: how people sort money and decisions into separate mental categories.

Intertemporal Choice (Chapters 7–8)

• Discounted utility model: the standard model of choice over time, against which the alternatives are measured.
• Alternative intertemporal choice models: models that depart from the standard treatment of time.

Strategic Interaction and Conclusion (Chapters 9–11)

• Behavioral game theory: strategic analysis that allows for actual rather than idealised behaviour.
• Social preferences: concern for other people's outcomes and for fairness.

Themes the Publisher Highlights

• Heuristics and biases: the systematic shortcuts and errors in judgment, which receive extended treatment in this edition.
• Neuroeconomics: the use of evidence about the brain, listed by the publisher as new material in this edition.
• Rationality: the question of what it means to be rational, and why behaviour that looks irrational can sometimes serve people well.

Critical Analysis

Strengths

• An explicit interdisciplinary approach. The publisher states that psychology, evolutionary biology and neuroscience are all drawn on, and that the authors ask what it means to be rational and why seemingly irrational behaviour can sometimes serve people well.
• A sequence that follows the standard model. The parts move from values, beliefs and risk through time and then strategic interaction and social preferences, which follows the main topics of standard choice theory, and Chapter 7 presents the standard discounted utility model before its alternatives are taken up.
• Sustained treatment of key topics. The chapter page ranges show long chapters on choice under risk and uncertainty (about 69 pages), alternative intertemporal models (about 59) and social preferences (about 73), so these topics are treated at length.
• Teaching material. The publisher lists more examples and review questions in the third edition, and a companion website provides slides for lecturers and additional questions and further reading for students.
• Current case studies. The third edition adds topical cases such as voting behaviour in the Brexit referendum and the Trump election, and the obesity epidemic.

Limitations

• Not a gentle start. The publisher aims it at higher undergraduate and Master's students, and the stress on rigour and critical examination makes it denser than a short introduction.
• No chapter on policy. The contents list has no separate chapter on welfare or policy applications, topics that Cartwright's Behavioral Economics gives chapters of their own.
• Date. The edition is from 2017, so developments in the field since then are not covered.

Where It Fits in the Course

Wilkinson and Klaes and Edward Cartwright's Behavioral Economics are the two main undergraduate textbooks in the list. Cartwright presents behavioral economics as a set of models alongside experimental and field evidence and has separate chapters on learning, evolution and culture, neuroeconomics, happiness and utility, and policy; Wilkinson and Klaes devotes two chapters to choice over time, one on the discounted utility model and one on alternatives to it, and gives a separate chapter to mental accounting. Using both is feasible, with one as the main text.

Michelle Baddeley's Behavioural Economics: A Very Short Introduction is a compact overview, and Richard Thaler's Misbehaving is a first-person account of how the field developed; both are suited to a first look before the textbook. Camerer, Loewenstein and Rabin's Advances in Behavioral Economics is an edited collection of influential journal articles and a natural way to read primary sources once the textbook ideas are familiar, while Sanjit Dhami's The Foundations of Behavioral Economic Analysis is a graduate treatise for readers who want a systematic formal treatment.

How to Use This Book

The publisher aims the book at higher undergraduate and Master's students. Intermediate microeconomics is a sensible preparation, and some probability and algebra help in the chapters on risk and time. It suits students who already know the standard model and want to see how it is challenged.

A practical plan:

• Core: Chapters 1 and 2 for the aims and methods of the field, then Part II (Chapters 3 to 6), which supplies the concepts later parts use.
• Next: Part III (Chapters 7 and 8) on time and Part IV (Chapters 9 and 10) on strategic interaction and social preferences. After Part II they can be taken in either order if time is short.
• Finish: Chapter 11 for a synthesis of the field and its open questions.

Use the review questions and the additional questions on the companion website to test understanding after each chapter. Because the book keeps returning to the standard model, it helps to have the rational-choice version of each topic fresh in mind before reading the behavioral alternative.