Stefano DellaVigna on Psychology and Economics; Making Substantial Policy Inroads

New Hot Paper Commentary, January 2011

Stefano DellaVigna

Article: Psychology and Economics: Evidence from the Field

Authors: DellaVigna, S
Journal: J ECON LIT, Volume: 47, Issue: 2, Page: 315-372, Year: JUN 2009
* Univ Calif Berkeley, Berkeley, CA 94720 USA.
* Univ Calif Berkeley, Berkeley, CA 94720 USA.
* NBER, Cambridge, MA 02138 USA.
(Commentary for November 2010 [late entry])

Stefano DellaVigna talks with and answers a few questions about this month's New Hot Papers paper in the field of Economics & Business.

SW: Why do you think your paper is highly cited?

Psychology and Economics (a.k.a. Behavioral Economics) is a recent area of research within economics which has attracted quite a bit of attention not only within economics, but also outside. It consists of the approach of taking insights from psychology—such as that people have self-control problems, or are non-Bayesian in their calculations—and applying these insights to economic decisions, such as savings, health behavior, or financial investments.

While a growing number of researchers want to read about this field, there is no textbook. The article I wrote is a comprehensive overview of the main developments in the area, with a focus on empirical applications. I think that it is highly cited because people go to it as a resource for accumulated knowledge in the area.

SW: Does it describe a new discovery, methodology, or synthesis of knowledge?

Researchers in the field use standard methodologies from economics, but enrich the standard economist's model by considering additional psychological factors. For example, in behavioral finance, researchers analyze asset prices assuming that investors may be inattentive to a subtle phenomenon.

SW: Would you summarize the significance of your paper in layman’s terms?

"We learn from psychology that making forecasts is a treacherous business!"

Have you never been convinced by the traditional economic analysis? In Psychology and Economics you will find employees who wish to save more tomorrow, just not today; consumers who care enough for others to sacrifice payoffs to help others, and to punish defectors; home-owners who do not want to sell their house if it is at a loss relative to the purchase price. And more!

SW: How did you become involved in this research, and how would you describe the particular challenges, setbacks, and successes that you've encountered along the way?

While writing my undergraduate thesis on a mathematical area of economics (decision theory), I came across the work of Kahneman and Tversky, and of Herbert Simon (both Kahneman and Simon are Nobel Prize winners). Their emphasis on enriching economics using the insights from psychology made so much sense to me, it has never left me. I was also very lucky to have as a mentor at Harvard David Laibson, one of the great minds in the area.

SW: Where do you see your research leading in the future?

We learn from psychology that making forecasts is a treacherous business! I love the intellectual freedom to investigate topics as diverse as criminal behavior, over-eating, stock choice, and charitable giving—these are some of the topics I have worked on. Recently, I have become particularly interested in studying a model of why people vote based on social signaling—you vote because you expect others will ask, and you want to report that you voted.

SW: Do you foresee any social or political implications for your research?

This research has already been making substantial policy inroads. The work of David Laibson, Brigitte Madrian, and Richard Thaler on savings, for example, was a key engine behind the Act passed in Congress in 2006 that incentivizes companies to set defaults in savings plans so as to increase savings rates. One of the two authors of the book Nudges, Cass Sunstein, is playing an important role in the Obama administration, while the other author, Richard Thaler, is out accumulating more evidence that may one day also feed into policy.End

Stefano DellaVigna
Associate Professor of Economics
University of California, Berkeley
Berkeley, CA, USA




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