39
B E H A V I O R A L E C O N O M I C S
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C A M E R E R A N D L O E W E N S T E I N
funds—self-serving biases, and social comparison of pay and benefits (otherwise,
why are salaries kept so secret?).
In all these cases, conventional economic language has emerged that begs the
deeper psychological questions of where adjustment costs, rigidities, mental “is-
lands,” contractual incompleteness, effort-aversion, and influence costs come from.
Cognitively detailed models of these phenomena could surely produce surprising
testable predictions.
Is Psychology Regularity an Assumption or a Conclusion?
Behavioral economics as described in this chapter, and compiled in this book,
generally
begins
with assumptions rooted in psychological regularity and asks
what follows from those assumptions. An alternative approach is to work back-
ward, regarding a psychological regularity as a
conclusion
that must be proved,
an
explanandum
that must be derived from deeper assumptions before we fully
understand and accept it.
The alternative approach is exemplified by a fashionable new direction in eco-
nomic theory (and psychology, too), which is to explain human behavior as the
product of evolution (see
Journal of Economic Perspectives
, Spring 2002). Theo-
ries of this sort typically describe an evolutionary environment, a range of behav-
iors, and precise rules for evolution of behavior (e.g., replicator dynamics), and
then show that a particular behavior is evolutionarily stable. For example, over-
confidence about skill is evolutionarily adaptive under some conditions (Postle-
waite and Comte 2001; Waldman 1994). Loss-aversion can be adaptive (because
exaggerating one’s preference for an object improves one’s outcome under the
Nash bargaining solution and perhaps other protocols; see Carmichael and
MacLeod 1999). Rejections of low offers in take-it-or-leave-it ultimatum games
are often interpreted as evidence of a specialized adaptation for punishing part-
ners in repeated interactions, which cannot be “turned off ” in unnatural one-shot
games with strangers (Samuelson 2001).
We believe in evolution, of course, but we do not believe that behavior of intel-
ligent, modern people immersed in socialization and cultural influence can be un-
derstood
only
by guessing what their ancestral lives were like and how their brains
might have adapted genetically. The problem is that it is easy to figure out whether
an evolutionary story identifies causes sufficient to bring about particular behavior,
but it is almost impossible to know if those causes were the ones that actually did
bring it about. So it is crucial, as with all models, to require the evolutionary stories
to make falsifiable predictions and be consistent with as much available data as
possible.
25
For example, the idea that rejections in one-shot ultimatum games come
25
Winter and Zamir (1997) articulate the “unnatural habitat” viewpoint with remarkable precision.
They write, “Although subjects fully understand the rules of the game and its payoff structure, their
behavior is influenced by an unconscious perception that the situation they are facing is part of a much
more extended game of similar real-life interactions.” If the perception is truly unconscious, this ac-
count is immunized from falsification. For example, if subjects say, “I know the difference between a
one-shot and a repeated game” (as most subjects do) their statements can be discounted if they are
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