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Psychology and Economics

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  • Matthew Rabin

Abstract

Because psychology systematically explores human judgment, behavior, and well-being, it can teach us important lessons about how humans differ from the way they are traditionally described by economists. This essay discusses a selection of psychological findings relevant to economics. While standard economics assumes that each person maximizes stable and coherent preferences given rationally-formed probabilistic beliefs, psychological research teaches us about ways to describe preferences more realistically, about biases in belief-formation, and about ways it is misleading to conceptualize people as attempting to maximize stable, coherent, and accurately perceived preferences.

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  • Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    • Handle: RePEc:aea:jeclit:v:36:y:1998:i:1:p:11-46
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