My holiday reading started with the book Behavioral Economics: A History by Floris Heukelom. The book provides a interesting take on how behavioral economics has grown from humble beginnings to the huge phenomenon that it now is. A nice review of the book has been written by Andreas Ortmann and so I will not delve too deeply into general comment here, other than to say I enjoyed reading the book.
But in terms of more specific comment, one theme running throughout the book is the distinction between behavioral economics and experimental economics. Heukelom makes clear that he thinks there is a very sharp distinction between these two fields. Personally I have always thought of them both as part of one big entangled blob. There are people who clearly prefer to label themselves a behavioral economist or an experimental economist but this seemed to me more a matter of personal preference than any grand design. So, what is the difference between behavioral and experimental economics?
Heukelom's viewpoint is based on a very narrow definition of experimental economics and behavioral economics. Specifically, he associates experimental economics with the work of Vernon Smith on experimental asset markets and he associates behavioral economics with the work of Kahneman, Tversky and Thaler, particularly with regard to prospect theory. The gap between research on market efficiency in the lab and that on prospect theory is indeed large. For instance, the first is more focused on market institutions and ecological rationality (i.e. how do markets work) while the later is focused on individual decision making and individual rationality (i.e. how do people behave). So, here a neat dividing line does potentially exist.
The problem with this view is that experimental asset markets are, and long have been, only one small part of work that must surely fall under the umbrella of experimental economics. (See, for instance, the short summary on the early years of experimental economics by Alvin Roth.) Similarly, prospect theory is only one small part of work that must fall under the umbrella of behavioral economics. For example, one elephant in the room here is game theory. From its very beginnings game theory has had an experimental side which has grown alongside work on markets. For instance, experiments with the prisoners dilemma and social dilemmas more generally began in the 1950s, if not before, and are generally seen as a big part of experimental economics. Similarly, a big part of behavioral economics has been to understand social preferences and move away from the standard economic assumption of selfishness. Indeed, the dictator game, which is now a mainstay of experimental economics, was first used by Kanheman, Knetsch and Thaler in a paper published in 1986.
In short, everything is mixed up. Other ways of trying to find a neat dividing line between behavioral and experimental economics would also seem doomed to end up with a mess. For instance, at the end of the book Heukelom associates modern behavioral economics with the use of mathematical methods. But that would seemingly exclude a host of behavioral economics, Dan Ariely to name just one, whose work is not particularly characterized by the use of mathematics. Similarly, experimental economists, like Robert Sugden and Chris Starmer, have been prominent in recent developments in prospect theory.
This is not to say that experimental and behavioral economics are the same. Experimental economics is characterized by a method of doing things - namely experiments - while behavioral economics (although much harder to tie down) is more characterized by an objective to understand how people reason in economic contexts. The trouble is it is hard to see how the one can be done without the other. Pushed to the limits it may be possible to study experimental markets without being bothered with individual behavior. Or to work on individual behavior without recourse to lab or field experiments. The truth, though, is surely that the two go very much hand in hand and, given that we are talking about the history of behavioral economics, always have done.
An interesting question is how things will develop in the future. Both the terms experimental and behavioral economics are essentially referring to methods. In the infancy of something like experimental economics it is natural that someone doing experiments would use a label like experimental economics to distinguish what they are doing. But the more routine it becomes for the 'average' economist to use experiments or draw on behavioral theory the less relevant the labels would seem to be. Instead we could gravitate towards a focus on applications with more use of the labels like public, labor and development economics. Behavioral economics is, though, presumably too much of a buzz phrase for that to happen any time soon.
Heukelom's viewpoint is based on a very narrow definition of experimental economics and behavioral economics. Specifically, he associates experimental economics with the work of Vernon Smith on experimental asset markets and he associates behavioral economics with the work of Kahneman, Tversky and Thaler, particularly with regard to prospect theory. The gap between research on market efficiency in the lab and that on prospect theory is indeed large. For instance, the first is more focused on market institutions and ecological rationality (i.e. how do markets work) while the later is focused on individual decision making and individual rationality (i.e. how do people behave). So, here a neat dividing line does potentially exist.
The problem with this view is that experimental asset markets are, and long have been, only one small part of work that must surely fall under the umbrella of experimental economics. (See, for instance, the short summary on the early years of experimental economics by Alvin Roth.) Similarly, prospect theory is only one small part of work that must fall under the umbrella of behavioral economics. For example, one elephant in the room here is game theory. From its very beginnings game theory has had an experimental side which has grown alongside work on markets. For instance, experiments with the prisoners dilemma and social dilemmas more generally began in the 1950s, if not before, and are generally seen as a big part of experimental economics. Similarly, a big part of behavioral economics has been to understand social preferences and move away from the standard economic assumption of selfishness. Indeed, the dictator game, which is now a mainstay of experimental economics, was first used by Kanheman, Knetsch and Thaler in a paper published in 1986.
In short, everything is mixed up. Other ways of trying to find a neat dividing line between behavioral and experimental economics would also seem doomed to end up with a mess. For instance, at the end of the book Heukelom associates modern behavioral economics with the use of mathematical methods. But that would seemingly exclude a host of behavioral economics, Dan Ariely to name just one, whose work is not particularly characterized by the use of mathematics. Similarly, experimental economists, like Robert Sugden and Chris Starmer, have been prominent in recent developments in prospect theory.
This is not to say that experimental and behavioral economics are the same. Experimental economics is characterized by a method of doing things - namely experiments - while behavioral economics (although much harder to tie down) is more characterized by an objective to understand how people reason in economic contexts. The trouble is it is hard to see how the one can be done without the other. Pushed to the limits it may be possible to study experimental markets without being bothered with individual behavior. Or to work on individual behavior without recourse to lab or field experiments. The truth, though, is surely that the two go very much hand in hand and, given that we are talking about the history of behavioral economics, always have done.
An interesting question is how things will develop in the future. Both the terms experimental and behavioral economics are essentially referring to methods. In the infancy of something like experimental economics it is natural that someone doing experiments would use a label like experimental economics to distinguish what they are doing. But the more routine it becomes for the 'average' economist to use experiments or draw on behavioral theory the less relevant the labels would seem to be. Instead we could gravitate towards a focus on applications with more use of the labels like public, labor and development economics. Behavioral economics is, though, presumably too much of a buzz phrase for that to happen any time soon.
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