- Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 24: Accounting for Behavioral Biases for Non-biased Demand Estimations
24. Accounting for behavioral biases for nonbiased demand estimations* Meloria Meschi† and Carla Pace‡ 58 59 1 INTRODUCTION Behavioral economics combines insights from psychology and traditional economic models to represent the process by which economic agents make decisions. As recently as 20 years ago, it was on the fringe of the discipline. During the past few years, however, the study of how people make choices has helped explain why human behavior appears sometimes to be at odds with mainstream economic predictions. It has also shown how ‘choice architectures’ can be established to nudge individuals in beneficial directions without restricting freedom of choice. With the institution of a ‘nudge’ Unit1 in the Cabinet of the British Prime Minister David Cameron, understanding how people actually make choices has also officially become an important step in designing policy and regulatory measures aimed at ‘nudging’ them in the desired direction. The standard economic model of human behavior is Homo economicus, a self-interested and rational being with perfect knowledge, a dislike of work and a love of wealth. Homo economicus makes decisions by weighing costs against benefits, and maximizes value and profit to himself. He is quite capable of perfect self-regulation when pursuing his future goals, a quality known as ‘time consistency’. The standard theory has only one flaw: Homo economicus is allegedly hard to find. Behavioral economics looks to Homo sapiens instead. This individual shows a lack of processing power (known as ‘bounded rationality’, a term coined by Nobel laureate Herbert Simon to characterize...
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