ABSTRACT
This chapter reviews some key differences between the Standard Economic Model (SEM) and behavioural economics. It provides a brief history of the place of psychology in economics and outlines some of the key principles of behavioural economics. It also describes how these principles have become influential in public policy worldwide. The underlying assumptions of the SEM, scarcely covered in most economics textbooks, are described by Wilkinson and Klaes in their Introduction to Behavioural Economics. The traditional concept of decision making comprises the following steps: consider a situation; think of possible actions; calculate which action is in your best interest; implement the action. The 'two systems' model which underlies behavioural economics can be traced back to the ancient Greeks. Whilst the SEM assumes that people will respond appropriately to information that facilitates the effective operation of markets, the reality is that people often lack the appropriate cognitive skills, the required computing power, and the relevant levels of self-control.
