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Behavioral Economics For Dummies

ISBN: 978-1-118-08503-5
384 pages
February 2012
Behavioral Economics For Dummies (1118085035) cover image


A guide to the study of how and why you really make financial decisions

While classical economics is based on the notion that people act with rational self-interest, many key money decisions—like splurging on an expensive watch—can seem far from rational. The field of behavioral economics sheds light on the many subtle and not-so-subtle factors that contribute to our financial and purchasing choices. And in Behavioral Economics For Dummies, readers will learn how social and psychological factors, such as instinctual behavior patterns, social pressure, and mental framing, can dramatically affect our day-to-day decision-making and financial choices.

Based on psychology and rooted in real-world examples, Behavioral Economics For Dummies offers the sort of insights designed to help investors avoid impulsive mistakes, companies understand the mechanisms behind individual choices, and governments and nonprofits make public decisions.

  • A friendly introduction to the study of how and why people really make financial decisions
  • The author is a professor of behavioral and institutional economics at Victoria University

An essential component to improving your financial decision-making (and even to understanding current events), Behavioral Economics For Dummies is important for just about anyone who has a bank account and is interested in why—and when—they spend money.

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Table of Contents

Introduction 1

Part I: Introducing Behavioral Economics: The Science of Making Real-World Choices 7

Chapter 1: Decoding Behavioral Economics 9

Chapter 2: Getting Real about Assumptions 19

Chapter 3: Neuroeconomics: Exploring the Brain for Economic Analysis 41

Chapter 4: Why Incentives and Markets Matter, but Money Isn’t Everything 65

Part II: Understanding Choice 89

Chapter 5: Exploring the Limits to Free Choice 91

Chapter 6: Quick and Simple Heuristics and Real-World Decision Making 107

Chapter 7: How the Framing of Choices Affects Decision Making 131

Chapter 8: How Norms, Peers, History, and Culture Influence Choice 153

Chapter 9: Why Gender, Children, and Age Matter for Economic Analysis 167

Part III: Growing the Economic Pie: The Economic Importance of Ethics, Well-Being, and Culture 181

Chapter 10: Why Smart People Pay Taxes, Recycle, and Even Break the Law 183

Chapter 11: Labor Supply in the Real World 197

Chapter 12: The Black Box of the Firm: Human Relationships and Productivity 215

Chapter 13: The Good Economy: How Ethical Behavior Can Grow the Economy 229

Chapter 14: Why Institutions Matter 243

Part IV: When Bubbles and Busts and Inefficiencies Are Possible: Some Behavioral Insights into the Strange World of Economic Reality 257

Chapter 15: Deciphering Behavioral Finance 259

Chapter 16: Looking into Recessions and Depressions 275

Chapter 17: The Art and Science of Happiness: Can You Be Happy without More Money? 291

Part V: The Part of Tens 309

Chapter 18: Ten (Or So) Key Public Policy Implications of Behavioral Economics 311

Chapter 19: Ten (Or So) Experiments in Behavioral Economics 321

Chapter 20: Ten Decision-Making Lessons from Behavioral Economics 333

Index 341

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Author Information

Morris Altman, PhD, is a professor of behavioral economics at Victoria University of Wellington in New Zealand and a professor of economics at the University of Saskatchewan in Canada. He is on the board of the Society for the Advancement of Behavioral Economics and is a former president of that organization. He also edited the Handbook of Contemporary Behavioral Economics.
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Press Release

March 30, 2012
Make Smart Financial Decisions and Avoid Impulsive Investing Mistakes

We all think that we make financial and economic decisions based purely on rational self-interest and conventional wisdom, but the truth is that a whole host of subtle and not-so-subtle factors contribute to our financial and purchasing choices, whether we’re aware of it or not.  They’re the reasons we can make impulsive investment mistakes, why stock markets sometimes plunge so dramatically, and why governments make certain policy decisions.

Morris Altman, professor at Victoria University of Wellington and author of Behavioral Economics For Dummies (Wiley; February 2012; $25.99; Paper) says that behavioral economics – the study of how social and psychological factors such as social pressure,  – is key to understanding our financial and economic decisions, and to making better ones in the future.

“Behavioral economics doesn’t assume that people must or even should behave in a way that’s deemed rational by conventional economics,” says Altman.  “The fact is, more often than not, people behave in ways that aren’t consistent with the conventional wisdom.”

That’s not to say that conventional economics have no place in the economic and financial world – quite the opposite.  It’s the addition of behavioral economics that enriches our traditional ideas by using insights from the fields of psychology, sociology, the law, neuroscience, and politics.  “We end up with more vibrant and revealing economic analyses based on more realistic assumptions about how individuals behave in the real world and the real-world circumstances that influence the decisions they make,” says Altman.

Morris Altman is available for interviews and can speak about:

  • The explanation of recessions and stock market plunges, from a behavioral economics perspective;
  • The top 3 lessons that behavioral economics can teach us about making financial decisions;
  • Using the principles of behavioral economics to improve one’s finances;
  • How emotions, culture, past experiences, etc. affect our decisions;
  • How one’s gender and age affects our choices;
  • The relationship between the economy and happiness;
  • How investment firms can use behavioral economics to improve productivity.
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