How Behavioral Economics Makes the Same Mistakes

Behavioral economists recognize how simplistic the standard economic model of choice is and have proposed more elaborate models as alternatives. Using the work of experimental psychologists who studied decision-making in various contexts and situations, behavioral economists pointed out specific quirks or anomalies in our decision-making processes, systematic and predictable errors that prevent us from reaching our true goals. These various cognitive biases and heuristics include framing effects, referring to the effect that the presentation of options has on the choices people make, and endowment effects, which tend to make you demand more to give up something that you own than what you would offer to get it if you didn’t. In many cases, these cognitive effects represent significant deviations from the textbook models of rationality used by mainstream economists, and have helped to generate more accurate explanations and predictions of choice in studies of consumer behavior, financial markets—and legal studies, as we’ll see in the next chapter.