Micro-Based Behavioral Economics

Micro-based behavioural economics (JEL D9) incorporates psychological realism into models of individual economic choice.

Scope

It covers departures from expected-utility theory, heuristics and biases, time-inconsistent preferences, and behavioural welfare economics.

Sub-topics

• General
• Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

Core questions

• How do real choices depart from rational models?
• How do framing and reference points affect decisions?
• How do people discount the future?
• What are the policy implications of behavioural findings?

Key concepts

• Prospect theory
• Loss aversion
• Reference dependence
• Mental accounting
• Present bias
• Nudges

Key theories

Prospect theory

Kahneman and Tversky modelled choice under risk with reference dependence and loss aversion.

Behavioural consumer choice

Thaler introduced mental accounting and other systematic departures from standard theory.

History

Behavioural economics grew from prospect theory (Kahneman & Tversky) and Thaler's anomalies into a major field reshaping micro, finance, and policy.

Debates

Behavioural realism versus model parsimony

Whether psychological realism improves economics or sacrifices tractable, predictive models.

Key figures

• Daniel Kahneman
• Amos Tversky
• Richard Thaler

Seminal works

• kahneman-tversky-1979
• thaler-1980

Frequently asked questions

What is loss aversion?

The finding that people weigh losses more heavily than equivalent gains, central to prospect theory.