Microeconomics and Psychology

Abstract

Psychologists, such as the Nobel Prize winner Daniel Kahneman, challenge the major assumptions of microeconomics: the rational pursuit of self-interest given unchanging tastes. These issues are explored through a questionnaire that may be distributed in class. How many of your students behave as the psychologists predict? Should economists adapt their theories of the market to reflect their findings? Prospect theory, changes in reference points, fairness, framing effects, loss aversion, the ultimatum game, herding, context dependence, the dictator game, preference reversals and the structure of the human brain are all illustrated through simple questions. The body of the paper connects the questions to the literature and introduces the debates between economists and psychologists.

Keywords: Psychology, Rationality, Behavior, Loss Aversion

JEL Classification: D03, C91