In one sense, applying insights about human nature and action to the explanation of economic behavior is as old as the discipline of economics itself. In fact, you might say that Adam Smith’s theory of the “invisible hand” just is the recognition of how the self-interested actions of individuals play out at the scale of local and national collective behavior. In other words, all economics is squarely founded on psychology in a general sense.
In another, narrower sense, though, the marriage of economic theory with more sophisticated insights into human behavior gleaned from the increasingly empirical orientation of psychologists over the past few decades is a much more recent phenomenon. It is this intersection of classical economic theory and recent personality and social psychology that we have in mind when we speak of “behavioral economics.”
The sub-discipline that calls itself by that name is less than 50 years old, has grown largely out of work done byDaniel Kahnemanand the lateAmos Tversky, beginning in the late 1960s at the Hebrew University of Jerusalem, and later at Stanford University. To be sure, their work on heuristics and decision-making under uncertainty, which would eventually grow into what we now call “behavioral economics,” did have some precedents — especially in the writings of Herbert A. Simon and others on real-world human cognitive limitations due (as they saw it) to finite neural computational resources (“bounded rationality”). Nevertheless, Kahneman and Tversky’s explicit challenge to the reigning paradigm of “rational choice theory” in economics (later elaborated by them and renamed “prospect theory”) was startling, not to say revolutionary. The theoretical rigor and empirical support of their work was so great, however, that it quickly won recognition, founding an entirely new academic field, and with it, a new way of thinking about economic behavior and human behavior generally.
I have cast my net widely, researching and consulting on many traditional behavioral economics topics such as racial discrimination, government and corporate corruption, corporate governance, labor markets, health policy, and much more. However, I have also worked on such innovative topics as the interrelationship between poverty and psychological factors.