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Behavioral Economics

Arthur O'Sullivan

Publication Date - 03 June 2022

ISBN: 9780197515921

472 pages
7 1/2 x 9 1/4 inches

In Stock

Extends standard neoclassical economics models to incorporate features that are consistent with observed human behavior


Behavioral Economics extends standard neoclassical economics models to incorporate features that are consistent with observed human behavior. The text explores (i) pro-social behavior such as cooperation, trust, reciprocity, and voluntary contributions to public goods, (ii) intertemporal choice that may be distorted by present bias, and (iii) choice in uncertain environments that are influenced by decreasing sensitivity and relatively painful loss. It also explores the role of natural selection in shaping human behavior, highlighting the co-evolution of genes and culture.


  • Presents models that show the tradeoffs between material benefits and social concerns
  • Uses the insights of anthropologists and economists to explore the role of natural selection in shaping human thinking and behavior
  • Includes digital widgets that encourages interaction with the text

About the Author(s)

Arthur O'Sullivan is Dr. Robert B. Pamplin Jr. Professor of Economics at Lewis & Clark College. He is the author of Urban Economics, Ninth Edition (2019), the best-selling urban economics text, and co-author, with Steven Sheffrin and Stephen Perez, of Economics: Principles, Applications, and Tools, Tenth Edition (2020).

Table of Contents

    Part 1: Introduction

    Chapter 1. Introduction & Key Concepts of Microeconomics

    1. What is Behavioral Economics?
    2. Key Concepts: Marginal Reasoning
    Opportunity Cost
    The Marginal Principle
    The Equimarginal Principle
    3. Key Concepts: Equilibrium and Efficiency
    Nash Equilibrium
    Comparative Statics
    Pareto Efficiency

    Chapter 2. Insights from Behavioral Science
    1. Social Preferences and Social Norms
    Adam Smith and the Impartial Spectator
    Rule Following Task: Avatar Pedestrian
    Sharing the Rewards of Collaboration
    The 50-50 Norm
    Incurring a Cost to Enforce a Social Norm
    2. Mental Shortcuts
    Mental Accounting
    Default Options
    3. Cognitive Bias
    The Decoy Effect
    Present Bias
    4. Problems with Probabilities
    Rare Events
    The Gambler's Fallacy
    5. Instinctive Urges and Thoughtful Deliberation
    Apple versus Cupcake
    Hunting Practices of the Ju/'hoansi
    Why Do We Do That?
    Appendix to Chapter 2
    1. Anchors
    2. Confirmation Bias
    3. Overconfidence Effect
    4. Availability Heuristic

    Part 2: Social Preferences and Pro-Social Behavior

    Chapter 3. Social Norms: Sharing and Enforcement

    1. Utility Maximization with a Social Norm
    Utility Maximization
    2. Sharing Behavior: The Dictator Game
    Game Structure and Results
    Variation in Sharing Behavior
    3. Costly Norm Enforcement
    Third-Party Punishment of Norm Violators
    Structure of the Ultimatum Game
    A Norm-Sensitive Responder
    Equilibrium Responder Share
    A Norm-Sensitive Proposer
    4. Results from Ultimatum-Game Experiments
    Meta-Analysis of Ultimatum Experiments
    Crosswalk Rules and the Ultimatum Game
    5. Market Engagement and Social Norms

    Chapter 4. Trust
    1. The Trust Game: Investment & Production
    Game Structure
    Outcome in the Absence of a Sharing Norm
    2. A Sharing Norm for the Producer
    The Producer's Trade-Off: Material Benefit versus Norm-Violation Cost
    Varying Norm Sensitivity and Return Fractions
    The Investor Decision
    3. A Sharing Norm for the Investor
    The Investor's Trade-Off: Material Benefit versus Norm-Violation Cost
    Relative Norm Sensitivity and Equilibrium
    Social Norms, Efficiency, and Social Capital
    4. Experiments and Implications
    Experimental Results
    The Trust Game and Social Capital
    The Trust Game and Oxytocin

    Chapter 5. Public Goods and Voluntary Contributions
    1. Free Riding and Economic Experiments
    The Free-Rider Problem
    Results from Voluntary-Contribution Experiments
    2. Social Norms and Voluntary Contributions
    Norm: Efficient Contribution
    Norm: Equal Contribution
    Explaining a Path of Decreasing Contributions
    3. Punish Free Riders?
    Punishing Norm Violators
    Summary of Experimental Results

    Chapter 6. Identity, Norms, and Reciprocity in the Workplace
    1. Worker Reciprocity and Social Capital
    Perfect or Imperfect Information in the Workplace?
    Social Norms and Pareto Improvements
    2. Worker Identity and Effort
    Utility-Maximizing Effort
    Insiders versus Outsiders
    Norm Sensitivity and Effort
    Producer Investment in Identity Management
    3. Response to a Higher Wage
    Wages and a Sharing Norm
    Wages and the Work-Effort Norm
    Wages and Profit
    4. Evidence of Worker Reciprocity
    Field Experiments
    A Gift-Exchange Experiment

    Chapter 7. Voluntary Prices
    1. Voluntary Prices: Pay What You Want
    The Equal-Sharing Price and Norm-Violation Cost
    Sustainability of PWW Systems
    Economic Experiment: Pay What You Want versus Pay It Forward
    2. Public Broadcasting: Free Riders and Guilt-Tripping Pledge Drives
    Payoffs to Members and Free Riders
    Choosing the Length of a Pledge Drive

    Chapter 8. Imitation and Cultural Learning
    1.Imitation and Conformity
    Over-Imitation by Humans
    Over-Imitation: Humans versus Chimpanzees
    Conformity and Matching Pennies
    2.Faithful Imitation and Cultural Learning
    Manioc and Obscure Production Processes
    Social Learning: Humans versus Chimpanzees

    Part 3: Time Preferences

    Chapter 9. Discounting and Present Bias

    1. Conventional Discounting and Present Bias
    The Quasi-Hyperbolic Discount Function
    Present Bias and Doubling Your Apples
    Time Inconsistency
    Time Inconsistency and the Relative Values of Bundles
    Present Bias and Regret
    2. Estimates of Discounting Parameters
    Estimates of Conventional Discounting and Present Bias
    Economic Experiment: Patience among Mothers and Children
    3. Illustrations: Cupcake, Weed, Bucket List
    Cupcake versus Apple
    Homeowner versus Weed
    The Bucket List

    Chapter 10. Time Preferences and Saving
    1. Discounting and Intertemporal Choice
    Saving and the Equimarginal Principle
    Present Bias and Regret
    2. Saving Mandates and Nudges
    Response to Mandate: Active Saver
    Response to Mandate: Non-Saver
    Nudges: Defaults, Save More Tomorrow, and Saving Lotteries
    Clueless versus Savvy Consumers
    Three-Period Model of Intertemporal Choice
    Consumption Path of the Clueless (Naif)
    Regret of the Clueless
    Consumption Path of a Savvy Consumer
    Commitment Devices and Saving
    4. Present Bias and Pre-Commitment by Pigeons

    Chapter 11. When to Act
    1. Procrastination: Waiting Too Long
    Present Bias and a Clueless Decision-Maker
    Conditions for Procrastination
    2. Self-Awareness and Procrastination
    Backward Induction
    Evidence of Present Bias and Self-Awareness
    Clueless versus Self-Aware: How to Tell the Difference
    3. Preproperation: Acting Too Soon
    Present Bias and a Clueless Decision-Maker
    Conditions for Preproperation
    4. Self Awareness and Preproperation
    Backward Induction
    Is Being Clueless Better?

    Chapter 12. Application of Present Bias--Sin Taxes and Fertilizer
    1. Personally Harmful Products and Sin Taxes
    A Model of a Personally Harmful Good
    Present Bias and a Personally Harmful Good
    Savvy Consumers and Hobbling
    Support for Sin Taxes
    2. Present Bias and Fertilizer Investment
    Review of Intertemporal Choice Model
    Present Bias and the Fertilizer Investment
    Policy Options: Subsidy versus Nudge

    Part 4: Mental Accounting and the Endowment Effect

    Chapter 13. Mental Accounting for Consumers

    1. Mental Accounting and Fungibility
    Consumer Budgets and Fungibility
    Mental Accounting and Coupons
    2. Other Implications of Consumer Mental Accounting
    Mental Accounting and Sunk Cost
    Decoupling Cost and Benefit: Credit Cards and Ride-Hailing Services
    Regular versus Premium Gasoline

    Chapter 14. Loss versus Gain
    1. Asymmetric Influences of Loss and Gain
    The Greater Weight of Loss
    Measuring the Greater Weight of Loss
    Reappraisal and the Weight of Loss
    2. The Endowment Effect
    Willingness to Pay versus Willingness to Accept
    Classic Endowment Experiment
    Evidence for the Endowment Effect
    Endowment Effect for Chimpanzees and Capuchin Monkeys
    The Endowment Effect and Exchange
    Greater Weight of Loss and Loss Aversion

    Part 5: Risk Preferences and Decisions in Uncertain Environments

    Chapter 15. Risk Preferences and Prospect Theory

    1. Features of Prospect Theory
    Utility Function for Prospect Theory
    Utility Value and Certainty Equivalent
    2. Risk Aversion and Risk Neutrality
    Risk Aversion and the Risk Premium
    Risk Neutrality: Linear Utility and No Loss Aversion
    Sources of Risk Aversion
    3. The Values of Key Parameters
    Relative Weight of Loss
    Decreasing Sensitivity to Gain and Loss
    Measuring Sensitivity to Stimulus
    Economic Experiment: Risk Preferences and Cognitive Ability
    4. Risk Preferences of Rats

    Chapter 16. Problems with Probability
    1. Probability in Prospect Theory
    Prelec Probability Weighting
    Psychological Foundations
    A Closer Look at Rare Events
    2. Learning by Description versus Learning by Experience
    3. Solving Puzzles with Probability Weighting
    The Numbers Game Puzzle
    The Longshot Puzzle

    Chapter 17. Prospect Theory & Asset Markets
    1.Decreasing Sensitivity and Attitudes toward Risk
    Decreasing Sensitivity to Gain and Risk Aversion
    Decreasing Sensitivity to Loss and Risk Seeking
    Constant Sensitivity and Risk Neutrality
    2. The Disposition Puzzle
    Reservation Price in a Winner Market
    Reservation Price in a Loser Market
    Reservation Prices and Time on the Market
    Evidence for the Disposition Puzzle
    3. Disposition Puzzle Disappears?
    Let Bygones be Bygones
    Constant Sensitivity to Gain and Loss
    4. The Equity Premium Puzzle
    Greater Weight of Loss and Loss Aversion
    Loss Aversion Solves the Equity Premium Puzzle
    Professional Traders: Too Much Information?

    Chapter 18. Prospect Theory and Insurance
    1. Decreasing Sensitivity and the Willingness to Pay for Insurance
    Decreasing Marginal Disutility of Loss
    Certainty Equivalent and Willingness to Pay for Insurance
    Willingness to Pay for Insurance versus Break-Even Price
    Economic Experiment: Willingness to Pay for Insurance
    2. Probability Weighting and Insurance Puzzles
    Decreasing Sensitivity and Probability Weighting
    The Hazard-Insurance Puzzle
    The Insurance-Deductible Puzzle

    Chapter 19. Reference Points and Goals
    1. Goals and the Marginal Principle
    Goal-Related Marginal Benefit
    Full Marginal Benefit and Choice
    Goals on the Golf Course
    2. Applications: Rainy Day Taxis and Abstinence
    Applications: Rainy-Day Taxis and Abstinence
    Rainy-Day Taxis
    Inefficiency and a Pareto Improvement

    Part 6: Natural Selection and Culture

    Chapter 20. Natural Selection and Co-Evolution of Genes and Culture

    1. Background Concepts from Evolutionary Biology
    DNA, Genetic Mutations, and Natural Selection
    Illustration: A Fire-Building Manual
    2. A Closer Look at Fitness and Evolution
    Fitness, Natural Selection, and Evolution
    Fitness Contests and Geometric Mean Fitness
    Economics versus Biology: Spider Somersaults
    3. Genes, Environment, Norms, Culture, and Cognition
    Genes and the Environment
    Genes and Culture
    Genes and Social Norms
    Instinctive Urges versus Thoughtful Deliberation

    Chapter 21. Cooperation
    1. Humans versus Chimpanzees
    Cooperation: Skills and Motivation
    Bearing a Cost to Enforce Norms
    2. Consumption and Production Benefits of Cooperation
    Benefits from Consumption Smoothing
    Benefits from Economies of Scale
    3. Co-Evolution of Genes and Culture
    Genes and Culture
    Cultural Learning

    Chapter 22. Loss Aversion and Time Preferences
    1. Natural Selection and Loss Aversion
    Steady versus Fluctuating Reproduction
    Gain Equals the Loss
    Gain Exceeds the Loss
    Fitness Equivalence
    Environmental Conditions and Genetic Mixes
    2. Natural Selection, Culture, and Time Preferences
    Trade-Offs from Investment
    Low Investment Productivity
    High Investment Productivity
    Lessons from Historical Data

    Chapter 23. Natural Selection and Risk Preferences
    1. Small Reward and Risk Aversion
    Geometric Mean Fitness
    Natural Selection and Risk Aversion
    2. Large Reward and Risk Neutrality
    Greater Fitness for Risk Takers
    Natural Selection Favors Risk Taking
    Fitness Equivalence
    Risk Aversion in Bonobos, Shrews, and Other Creatures
    3.Subsistence and Risk Seeking
    Subsistence and Risk Preferences
    The Flexible Risk Preferences of Juncos

    Chapter 24. Bargaining and the Endowment Effect
    1. A Hunter-Gatherer Exchange Economy
    Hunter-Gatherer Fitness
    Edgeworth Box and Gains from Exchange
    Bargaining and Equilibrium
    2. Natural Selection: Bargaining Outcomes
    Endowment Effect and Nash Equilibrium
    Disagreement Value and the Nash Bargaining Solution
    The Endowment Effect and Group Fitness
    Egalitarian Economy and the Endowment Effect