ABSTRACT
Behavioral economics applies psychological insights into economic decision making. Its aim is to describe how real people make decisions in their private and public lives under various constraints, such as time, knowledge, cognitive processing limitations or social pressure. From both field studies and experiments, behavioral economists now know that humans often do not behave in a rational manner in everyday life: their behavior is affected by heuristics (mental short cuts) and biases. This is in stark contrast to the assumptions that neoclassical (mainstream) economists make about economic behavior. In this sense, behavioral economics is about misbehaving: how real humans deviate from traditional economic model predictions. This introductory chapter introduces the reader to depictions of the two main conceptions of the economic mind. Mainstream economics emphasizes ECON: the cold, rational, calculating self-interested mind; while psychology focusses on HUMAN, the flesh-and-blood being who is limited in processing capacity, patience and motivation and who is prone to a number of biases, errors and influences in decision making. We see why behavioral economics developed and how it has become more widely accepted following the 2008 global financial crisis. The introductory chapter provides a road map for this relatively new, exciting, but potentially confusing field.
