Rev Ind Organ (2015) 47:243–245 DOI 10.1007/s11151-015-9475-y 1 2 Michael D. Grubb Victor J. Tremblay Published online: 9 September 2015 Springer Science+Business Media New York 2015 The ‘‘standard’’ model in economics assumes fully rational consumers, input suppliers, and producers. Preferences are stable and deﬁned over a narrow set of outcomes such as quality and quantity consumed, price paid, and risk borne. Other aspects of the environment such as reference points, default options, framing, and ambiguity are omitted. If present, asymmetric information stems from a common prior, and uninformed parties have both rational expectations and the strategic sophistication to make correct inferences from other players’ actions. As the evidence began to show that these assumptions are not always valid, new models were developed, and behavioral economics was born. Behavioral economics uses evidence from psychology and experimental economics to enrich our understanding of decision making. Although economists have long recognized psychological concepts (see Rabin 1998; Angner and Loewenstein 2012 for reviews of the literature), formal analysis began with Simon’s 1955 development of the concept of bounded rationality. Since then, relaxing the assumption of full rationality and standard assumptions on preferences has led to new theoretical models and new insights across many
Review of Industrial Organization – Springer Journals
Published: Sep 9, 2015
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