Beliefs in Behavioral and Neoclassical Economics

Authored by: Alan James MacFadyen

Handbook of Contemporary Behavioral Economics

Print publication date:  July  2006
Online publication date:  January  2015

Print ISBN: 9780765613028
eBook ISBN: 9781315703879
Adobe ISBN: 9781317469162


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In the most basic formulation of the rational choice model, which underlies neoclassical economics, an individual with given desires makes the optimal choice from among available opportunities. This suggests that individuals are cognitively active decision makers. However, for many behavioral economists, a major failing of neoclassical economics is the simplistic nature of its view of cognition. In line with this view, this chapter argues that conventional economics has failed to give adequate recognition to the concept of “beliefs.” More extended discussions of rationality make explicit room for beliefs. Elster, for example, argues that a model of rationality requires more than “desires” and “opportunities”; desires themselves are subject to rational evaluation, and individuals must gather an optimal amount of information and utilize that information to form optimal beliefs (Elster 1989a, ch. 4). The critical importance of beliefs in models of human behavior has been widely recognized in philosophy (e.g., de Souza 1987, 19) and evolutionary economics (e.g., Robson 2002, 89) as well as in cognitive psychology. This essay contrasts the role given to beliefs in behavioral economics with the narrow, almost invisible part it plays in conventional neoclassical economics. It provides a brief discussion of why models of economic behavior can usefully incorporate the concept of beliefs, presents a brief overview of what a “belief” is, sets out a framework for incorporating the concept of beliefs in economic analysis, and provides specific examples of the importance of the concept of beliefs by examining the beliefs of neoclassical and behavioral economists.

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