Behavioral Economics is an interdisciplinary field of research that aims to improve the explanatory and predictive power of economic theories by using behavioral hypotheses with a high degree of realism. This goal is pursued through an increasingly close and fruitful dialogue with other disciplines (from cognitive and social psychology to neuroscience) and the support of laboratory and field experiments.
One of the most relevant theories in behavioral economics is the “limited rationality theory” developed by Herbert Simon (1955). Limited rationality is the concept or idea that an individual’s rationality during the decision-making process is limited by several factors: the information they possess, the cognitive limitations of their mind, and the finite amount of time they have to make a decision. Limited rationality was proposed by Simon as an alternative basis for a mathematical model of decision making, integrating the previous model in which the decision-making process was assumed to be characterized by full rationality. Later, his subsequent findings in the field of decision making led to Simon being awarded the Nobel Prize in Economics in 1978. Despite his dedication to the subject, Simon was not the only behavioral economist to receive this honor. Psychologist Daniel Kahneman was awarded the 2002 Nobel Prize for integrating psychological research into economics through studies conducted with his friend and colleague Amos Tversky, who died in 1996. Kahneman’s work focused on human judgment and decision making under conditions of uncertainty.
Similarly, Robert Shiller was awarded the Nobel Prize in 2013 for his work in behavioral finance. Studies by Kahneman and Tversky (1974;1981) found that people do not think in statistical and rational terms, but use the so-called “heuristics”. This term was introduced by Herbert Simon in 1957 to describe cognitive shortcuts that allow individuals to make decisions, even if they are sometimes irrational, in order to save time and cognitive energy. In particular, Kahneman and Tversky studied decision-making under conditions of uncertainty and risk. Their experiments showed that systematic errors (cognitive bias) often occur in decision-making processes under conditions of uncertainty and risk. This violates the assumptions of rational choice theory. Such systematic errors, acting in a precise direction and under certain circumstances, are predictable, and by deepening the functioning of cognitive processes in decision-making it is possible to identify the causes.
In 2017, the economist Richard Thaler deepened the line of research opened by Kahneman and, in turn, was awarded the Nobel Prize. Thaler is considered the father of the nudge theory, which consists of a gentle push technique also used to guide people towards virtuous behavior (think of the automatic option of joining a pension fund for new employees in a company). This technique takes advantage of some common behaviors, such as inertia, to change an automatic choice.
In this context, the APRESO Research Center follows this line of research, with the aim of studying the factors that determine decision-making behavior in the workplace and the possible implementation of innovative practices (e.g., nudge) to promote well-being and work performance in organizations.
Simon, H. A. (1955). A behavioral model of rational choice. The quarterly journal of economics, 69(1), 99-118.
Tversky, A., & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases: Biases in judgments reveal some heuristics of thinking under uncertainty. science, 185(4157), 1124-1131.
Kahneman, D., & Tversky, A. (1981). The simulation heuristic. Stanford Univ CA Dept of Psychology.
Tversky, A., & Kahneman, D. (1981). Evidential impact of base rates. Stanford Univ Ca Dept Of Psychology.
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