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Edited by John B. Davis, Alain Marciano and Jochen Runde
Chapter 4: From Imperialism to Inspiration: A Survey of Economics and Psychology
4 From imperialism to inspiration: a survey of economics and psychology Bruno S. Frey and Matthias Benz Introduction Modern economics and psychology are both sciences of human behaviour. Although they have a common theme, their relationship still swings between pure co-existence and selective interaction. Starting from the analysis of human behaviour on markets, modern economics has developed a behavioural model which disregards psychological factors almost completely. The ‘homo oeconomicus’ takes decisions in a rational and emotionless manner. He or she compares the expected costs and utilities of the different alternatives at hand, and ﬁnally selects the one that beneﬁts him or her the most. Decisions are assumed to have a high degree of rationality (cognitive limitations resulting in systematically suboptimal decisions are disregarded); they are based on unlimited willpower (self-control problems and emotions do not play a role); and actions are solely guided by self-interest (the homo oeconomicus does not have pro-social preferences, i.e. the utility of other individuals does not enter into his decision calculus). Homo oeconomicus, however, reacts to changes in his possibility space in a systematic and therefore predictable way: when the relative price (or the opportunity cost) of a good or an activity increases, the demand for the respective good will fall, and the respective activity will be carried out less (‘law of demand’). This economic approach to human behaviour has been successfully applied to areas outside of the economy. Often termed ‘economic imperialism’, the economic approach has produced fruitful insights in such areas as...
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