Critics have pointed out that behavioral economics is not a unified theory, but is instead a collection of tools or ideas. This is true. It is also true of neoclassical economics. A worker might rely on a "single" tool-- say, a power drill-- but also use a wide range of drill bits to do various jobs. Is this one tool or many? As Arrow (1986) pointed out, economic models do not derive much predictive power from the single tool of utility-maximization. Precision comes from the drill bits—such as time-additive separable utility in asset pricing including a child's utility into a parent’s utility function to explain bequests, rationality of expectations for some applications and adaptive expectations for others, homothetic preferences for commodity bundles, price-taking in some markets and game-theoretic reasoning in others, and so forth.
For example, one recent model (Benabou & Tirole, 1999) derives overconfidence from hyperbolic time discounting. Agents, at time 0, face a choice at time 1 between a task that requires an immediate exertion of effort and a payoff delayed till time 2 which depends on their level of some skill. Agents know that, due to hyperbolic time discounting, some tasks that are momentarily attractive at time 0 will become unattractive at time 1. Overconfidence arises because they persuade themselves that their skill level – i.e., the return from the task – will be greater than it actually will be so as to motivate themselves to do the task at time 1. There may, however, be far more plausible explanations for the same phenomenon, such as that people derive utility directly from self-esteem. Indeed the same authors later proposed precisely such a model (Benabou & Tirole, 2000).
Sometimes these specifications are even contradictory— for example, pure self-interest is abandoned in models of bequests, but restored in models of life-cycle savings; and risk-aversion is typically assumed in equity markets and risk-preference in betting markets. Such contradictions are like the "contradiction" between a Phillips-head and a regular screwdriver: They are different tools for different jobs. The goal of behavioral economics is to develop better tools that, in some cases, can do both jobs at once.
Economists like to point out the natural division of labor between scientific disciplines: Psychologists should stick to individual minds, and economists to behavior in games, markets, and economies. But the division of labor is only efficient if there is effective coordination, and all too often economists fail to conduct intellectual trade with those who have a comparative advantage in understanding individual human behavior. All economics rests on some sort of implicit psychology. The only question is whether the implicit psychology in economics is good psychology or bad psychology. We think it is simply unwise, and inefficient, to do economics without paying some attention to good psychology.
We should finally stress that behavioral economics is not meant to be a separate approach in the long run. It is more like a school of thought or a style of modeling, which should lose special semantic status when it is widely taught and used. Our hope is that behavioral models will gradually replace simplified models based on stricter rationality, as the behavioral models prove to be tractable and useful in explaining anomalies and making surprising predictions. Then strict rationality assumptions now considered indispensable in economics will be seen as useful special cases (much as Cobb-Douglas production functions or expected value maximization are now)—namely, they help illustrate a point which is truly established only by more general, behaviorally-grounded theory.
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