Behavioral Economics – A History of the Program
Neo-classical economic models are built on the simplifying assumption that people are generally capable of making economic decisions consistently to maximize their own interests. Departures from rational maximization are considered largely to be random errors that disappear as people learn to behave more rationally or are eliminated from market competition if they don’t. Over the last twenty-five years, the new interdisciplinary field of behavioral economics has emerged to challenge this assumption. The Russell Sage Foundation was an early force in the development of this field, launching the Behavioral Economics program in 1986 as a joint activity with the Alfred P. Sloan Foundation.
Building on research in cognitive and social psychology and sociology, behavioral economists have shown that there are persistent, systematic departures from rationality in economic decision making, which are not purged by market forces, and which may well shape the way markets operate, rendering them less efficient than textbook market models. Behavioral economics has taken up the difficult task of working out how cognitive biases, mental rules of thumb, interpersonal relationships and social networks and norms can cause real-life economic decisions to deviate from the standards of rational, self-interested maximization. Behavioral economic principles have become increasingly useful in suggesting explanations of aspects of market behavior that defy standard explanations, and they are beginning to prove valuable guides to formulating economic policy.
During the first eight years of the program, the Foundation made 60 research awards, hosted three groups of Visiting Scholars, and established several working groups: one in behavioral finance, one on time preference (or inter-temporal choice), and another on economic sociology. These early activities resulted in a number of influential books on behavioral economics published by the Foundation, all of which remain key texts in the field today. Quasi Rational Economics (1991), by Richard Thaler, and Advances in Behavioral Finance (1993), also edited by Thaler, examine why standard economic models so often fail to predict market behavior accurately. According to Thaler, the shortcomings of the standard approach arise from its failure to take into account systematic mental biases that color all human judgments and decisions. For example, Thaler finds an explanation for superior price performance of firms with poor recent earnings histories in the tendencies of investors to overreact to recent information. Choice Over Time (1992), edited by George Loewenstein and Jon Elster, presents research on inter-temporal choice – how people choose between immediate and delayed consequences – and why people seem to discount future benefits in favor of immediate gratification. Understanding such behavior is particularly important with regard to such public policy concerns as the ballooning public and private debt, inadequate retirement savings rates, diminished educational achievement, and long-term environmental issues such as global warming.
The Behavioral Economics program primarily funds research through two avenues: our small grants program, under the authority of our Behavioral Economics Roundtable, and our Working Group on Consumer Finance and Behavioral Economics.
In 1992, the Foundation launched the Behavioral Economics Roundtable, whose initial members were elected by participants in the program and given RSF support to devise activities designed to advance this new interdisciplinary field. The results have been so consistently successful that the Roundtable has become the Foundation’s principal means of supporting behavioral economics. Now made up of 28 prominent behavioral economists, the Roundtable currently sponsors three main activities: a small grants program for younger scholars undertaking behaviorally oriented research; a two-week summer workshop taught by Roundtable members for graduate students and junior faculty interested in entering this new interdisciplinary field; and a book series in a behavioral economics co-published by RSF and Princeton University Press.
The Roundtable’s small grants program was launched in 1993 to help make the field more accessible to young investigators. Behavioral research often requires funds for running experiments or acquiring other kinds of behavioral data, the cost of which can be a significant barrier to young researchers. Since its inception, the small grants program has awarded over 180 grants of up to $7,500 each to help young researchers with the start-up costs of behavior projects. A complete list of grants can be found here. Entry-level researchers interested in applying for a small grant in the Roundtable’s program can find out how to do so on our How to Apply webpage.
The Roundtable’s second effort to make behavioral economics more accessible to prospective entrants into the field has been a highly successful Summer Institute held biennially since 1994. Designed to accommodate about thirty advanced graduate students or junior faculty who want a concise introduction to recent trends in behavioral research, each Summer Institute is organized by two or three Roundtable members who offer a core curriculum of lectures and seminars, while other Roundtable members provide guest lectures. The next Summer Institute will be held in 2014. Information about the Summer Institute and the application process will be posted on our website in early 2014.
In 2001, the Roundtable established a new book series as an outlet for behavioral work that could benefit from more lengthy treatment than is permitted in standard journals. The Roundtable Series in Behavioral Economics publishes books in economics that are deeply rooted in empirical findings or methods from one or more of the neighboring sciences and advance economics on its own terms – generating theoretical insights, making more accurate predictions of field phenomena, and suggesting better policy. The series is edited by Roundtable members Colin Camerer and Ernst Fehr, and co-published by Russell Sage and the Princeton University Press. Four titles have been published in the series to date: Behavioral Game Theory (2003) by Colin Camerer; Microeconomics: Behavior, Institutions and Evolutions (2003) by Samuel Bowles; Advances in Behavioral Finance, Vol. II (2005) edited by Richard Thaler; and Advances in Behavioral Economics (2003), a collection of foundational papers in the field edited by Colin Camerer, George Loewenstein, and Matthew Rabin. Several more titles are scheduled for publication over the next few years. Several more titles are scheduled for publication over the next few years. A full list of the Foundation's behavioral economics publications appears here.
Working Group on Consumer Finance and Behavioral Economics
Between 2009 and 2014, RSF, together with the Alfred P. Sloan Foundation, supported a Working Group on Consumer Finance and Behavioral Economics. The working group brought behavioral economics research to bear on analyzing consumers’ financial decision-making in order to inform regulatory strategies designed to improve consumer welfare. Among the questions the group addressed: How well do consumers understand the various kinds of loan contracts they enter into? Might different contractual formats improve consumer understanding? Is understanding alone sufficient to maximize consumer welfare, or do consumers need further protection against their own behavioral weaknesses (like impatience or overconfidence), which may get them into trouble even when they fully understand contractual terms? If so, what form should those protections take? Are warnings sufficient? Could default options be usefully deployed? Or, are some credit products so dangerous that outright bans are necessary, and if so, how do we decide which products those are? In addition to fostering basic research on these and related questions, the working group explored the implications of this research for potential regulatory strategies to protect consumers from financial products and services that may prove dangerous to their financial well-being. For more information about the working group and members’ projects, please click here.
Should you have any questions about the Behavioral Economics program, please contact us at firstname.lastname@example.org. Otherwise, all information on applying for a research award can be found at How to Apply.