Chapter 1 of Advances in Behavioral Economics highlights the core proposition of this emerging field – namely that real economic choices over risky outcomes do not conform to the expected utility (EU) hypothesis.
The EU hypothesis states that the utility of a risky distribution of outcomes is a probability-weighted average of the outcome utilities. Many violations of this principle are demonstrated with psychological experiments.
These violations suggest “nudge” theory – that small, apparently inconsequential changes in the things people use can have disproportionate effects on behavior.
Along these lines, I found this PBS report by Paul Solman fascinating. In it, Solman, PBS economics correspondent, talks to Sendhil Mullainathan at Harvard University about consumer innovations that promise to improve your life through behavioral economics – and can be gifts for this Season.
Happy Holidays all.