The Concise Encyclopedia of Economics

Behavioral Economics

Richard H. Thaler and Sendhil Mullainathan

All of economics is meant to be about people's behavior. So, what is behavioral economics, and how does it differ from the rest of economics?

Economics traditionally conceptualizes a world populated by calculating, unemotional maximizers that have been dubbed Homo economicus. The standard economic framework ignores or rules out virtually all the behavior studied by cognitive and social psychologists. This "unbehavioral" economic agent was once defended on numerous grounds: some claimed that the model was "right"; most others simply argued that the standard model was easier to formalize and practically more relevant. Behavioral economics blossomed from the realization that neither point of view was correct.

The standard economic model of human behavior includes three unrealistic traits--unbounded rationality, unbounded willpower, and unbounded selfishness--all of which behavioral economics modifies....


Public Choice

William F. Shughart II

James Edward Meade

(1907-1995). Biography.


George J. Borjas

Health Care

Michael A. Morrisey

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Herbert Alexander Simon


In 1978 American social scientist Herbert Simon was awarded the Nobel Prize in economics for his "pioneering research into the decision-making process within economic organizations." In a stream of articles, Simon, who trained as a political scientist, questioned mainstream economists' view of economic man as a lightning-quick calculator of costs and benefits. Simon saw people's rationality as "bounded." Because getting information about alternatives is costly, and because the consequences of many possible decisions cannot be known anyway, argued Simon, people cannot act the way economists assume they act. Instead of maximizing their utility, they "satisfice"; that is, they do as well as they think is possible. One way they do so is by devising rules of thumb (e.g., save 10 percent of after-tax income every month) that economize on the cost of collecting information and on the cost of thinking....


John F. Nash


... Except for one course in economics that he took at Carnegie Institute of Technology (now Carnegie Mellon) as an undergraduate in the late 1940s, Nash had no formal training in economics. He earned his Ph.D. in mathematics at Princeton University in 1950. The Nobel Prize he received forty-four years later was mainly for the contributions he made to game theory in his 1950 Ph.D. dissertation....