Psychology and Economics

Several developments have joined to stimulate economists to think about issues that have been on the forefront of psychological research. Firstly, the information revolution in economics has focused economists on the subtle nature of individual information processing. Secondly, developments in game theory have so successfully identified new solution concepts that for almost any pattern of market behaviour there exists a reasonable theory consistent with that pattern. Introspection, a few principles of decision making, internal consistency and a few stylized facts do not constrain possibilities enough to be sufficient guides to theory. Theorists are being forced to seek more systematic sources of data and additional principles to reduce the number of competing theories. Thirdly, the rapid development of experimental methods applicable to economics has brought the testing of psychologically based economic theories within the realm of reality. Economists can accurately measure behaviour in economically relevant settings. As behavioural patterns become established that are difficult to reconcile with economic models alone, the profession has begun to look to psychology for answers. The data thus force the attention of economists to a broader class of models.