Summary

1. The traditional economic models of the previous chapters assume that economic actors such as consumers and firms are fully rational, self-interested, maximize their well-being, and don’t make systematic errors. Behavioral economics argues that the conventional models do not take into account psychological biases in human behavior, and that these systematic biases affect the decisions made by parties in an economic transaction. Such biases include overconfidence, time inconsistency, susceptibility to framing, attention to sunk cost, and possibly altruistic behavior. [Section 18.1]

2. Even if we accept the existence of systematic human psychological biases, the fundamental microeconomics of the preceding chapters is still incredibly valuable and relevant to the real world. Markets tend to take advantage of people suffering from psychological biases and drive them out (or take their money). [Section 18.2]

3. Economists have moved into a new realm of testing economic theories using lab, natural, and field experiments rather than purely econometric data analyses. Experiments allow economists to test only the economic theory of interest, holding all else equal. [Section 18.3]

4. Microeconomics is, perhaps, the most important and useful thing you will ever learn in your life. [Section 18.4]