Behavioural Economics
The field of economics that has fascinated me the most recently is behavioural economics. Ever since I read Predictably Irrational by Prof. Dan Ariely of the MIT, I have been pretty intrigued by the field.
To briefly summarise, behavioural economics investigates the existence of the 'rational' economic man. Are human beings in real world as rational as what our models/ assumptions state? For example, do we really maximise at the margin when we are consuming goods?
I must say that I am very impressed with the huge literature that has developed in the field in the past few years. http://www.neweconomics.org/gen/uploads/tfi0ypn1141p45zoi0mrrgf222092005201739.pdf gives a good summary of the key insights developed recently, and its implications. I'm thinking of whether it is possible to do a dissertation on the incorporation of some of the key insights ( for example, institutional norms/ habitual formation) into mainstream economics. Like how will our models look if we were to have some of the features suggested by behavioural economists? Will that alter our analysis?
Even better, will behavioural economics lead to different predictions for our traditional game theoretic models? Game theory relies strongly on the assumptions that agents are rational, but is this a valid assumption in the real world given the work done by behavioural economists?
Those are some theoretical ideas which I have. In terms of empirics, I was actually contemplating on doing some pyschological test to observe how people make decisions when faced with different numbers of choices. For example, how will it affect our opportunity costs? Will you prefer to have limited choices, or a large number of choices? Is more going to make you worse off?
Oh well, but designing the experiment is the headache, since 1) the problem of endogeneity exists everywhere; 2) I need to PAY people to do my experiments which will BURN a hole in my pocket. Hmmm, but designing is more difficult, especially with the problem of revealed and stated preferences. Ouch, shall go and think...
To briefly summarise, behavioural economics investigates the existence of the 'rational' economic man. Are human beings in real world as rational as what our models/ assumptions state? For example, do we really maximise at the margin when we are consuming goods?
I must say that I am very impressed with the huge literature that has developed in the field in the past few years. http://www.neweconomics.org/gen/uploads/tfi0ypn1141p45zoi0mrrgf222092005201739.pdf gives a good summary of the key insights developed recently, and its implications. I'm thinking of whether it is possible to do a dissertation on the incorporation of some of the key insights ( for example, institutional norms/ habitual formation) into mainstream economics. Like how will our models look if we were to have some of the features suggested by behavioural economists? Will that alter our analysis?
Even better, will behavioural economics lead to different predictions for our traditional game theoretic models? Game theory relies strongly on the assumptions that agents are rational, but is this a valid assumption in the real world given the work done by behavioural economists?
Those are some theoretical ideas which I have. In terms of empirics, I was actually contemplating on doing some pyschological test to observe how people make decisions when faced with different numbers of choices. For example, how will it affect our opportunity costs? Will you prefer to have limited choices, or a large number of choices? Is more going to make you worse off?
Oh well, but designing the experiment is the headache, since 1) the problem of endogeneity exists everywhere; 2) I need to PAY people to do my experiments which will BURN a hole in my pocket. Hmmm, but designing is more difficult, especially with the problem of revealed and stated preferences. Ouch, shall go and think...
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