Information, Technology, and Innovation: Resources for Growth in a Connected World

CHAPTER 3

Behavioral Economics

Why do people do what they do? In the twentieth-century West, neoclassical economics asserted that rational people want more of most things and will act to achieve this goal. The assumption is embedded in virtually every economics course taught in western universities and operationalized from there onward. One implication of said rationality is that one way to motivate people is to promise them more of something (typically money) in return for more of a desired behavior. Both the bonus culture of Wall Street, so much in the news after 2008, and the debate over competing views of chief executive compensation silently embed this set of assumptions. In the laboratory and in the wild, however, people don't actually do the rational thing all that often. The discovery of reliable behavioral patterns that defy neoclassical rationality aligns closely with a broad range of technology-related phenomena.

Challenges to Economic Man

Beginning in the 1960s, psychologists and economists began to employ theories of human motivation to explain certain decisions and other economic actions. Previously, market behavior had been theorized in neoclassical economics to be the outcome of a) rational actors b) who have identified preferences that can be associated with a value c) acting independently with access to full and relevant information d) to improve their utility as individuals or profits as firms.¹ Economic man turns out to be more complex than was previously thought, ...