6. Behavioral Economists, and Psychologists’ Challenges to Rational Behavior

Behavioral economics has emerged as a subdiscipline in economics over the last half of the twentieth century because of the work of scholars whose main contributions were outside the strict boundaries of economics, most prominently Herbert Simon and Daniel Kahneman. Simon won the 1978 Nobel prize in economics for his work on “bounded rationality” applied to firm organization, collected in his three-volume set published in 1982, and Kahneman received the 2002 Nobel prize in economics, for his work on “prospect theory” developed largely in collaboration with the late Amos Tversky (Kahneman and Tversky 1979, 2000a, among a host of citations). Behavioral economics now covers a massive scholarly literature and, more recently, a growing list of widely read trade books on the subject. In this chapter, I seek to cover only a portion of the literature, but enough to establish credibility of the formidable challenge that behavioral economics and behavioral psychology present to conventional, neoclassical economics. Mainly, reservations and criticisms regarding this literature are covered in Chap. 10.