Lecture 1: Introduction and Overview I (14.13 Psychology and Economics, Spring 2020)

Behavioral economics challenges the standard neoclassical model of "homo economicus" by integrating psychological insights to create more realistic and predictive economic frameworks. While traditional models rely on assumptions of perfect rationality, stable preferences, and exponential discounting, empirical evidence reveals significant deviations, such as limited self-control, cognitive biases, and social influences. For instance, the stark difference in organ donation rates between opt-in and opt-out systems demonstrates how default choices profoundly impact behavior, contradicting the assumption that individuals always make optimal, independent decisions. Similarly, research on laptop usage in classrooms highlights how overconfidence and multitasking limitations negatively affect learning outcomes. By relaxing these rigid assumptions and focusing on tractable, evidence-based improvements, behavioral economics provides a more nuanced understanding of human decision-making, ultimately informing more effective policies regarding poverty, health, and social welfare.