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factor in this shift has been the so-called formalist revolution in economics during
the immediate post-World War II era (Blaug, 2001). But in order to appreciate the
emergence and position of behavioral economics within the wider context of the
development of economic thought, one needs to bear in
mind that for much of its
history, economic thought has evolved in close proximity to psychological reasoning.
The classical and neoclassical approaches
There tends to be a widespread belief that the economists of the eighteenth and
nineteenth centuries who pioneered the discipline had no time for psychology.
The neoclassicists in particular are often portrayed as systematizers who wanted to
bring mathematical rigor to their subject by imposing some simplifying assumptions
regarding motivation. A good example is the work of Daniel Bernoulli (1738), who
might be regarded as the originator of the theory of choice under risk,
explaining risk-
aversion in terms of the diminishing marginal utility of money.
However, the portrayal of the classical and early neoclassical schools as economic
schools of thought that developed in disregard of psychological and sociological insight
gives a misleading impression. Although Adam Smith is best known for his
Wealth of
Nations
, in 1776, he was also the author of a less well-known work,
The Theory of Moral
Sentiments,
in 1759. The latter contains a number of vital
psychological insights and
foreshadows many more recent developments in behavioral economics, particularly
relating to the role of emotions in decision-making.
Similarly, Jeremy Bentham, best known for introducing the concept of utility,
had much to say about the underlying psychology of consumers. Francis Edgeworth
wrote
Mathematical Psychics
in 1881, the title indicating
his concern with psychology;
this is refl ected in the well-known ‘Edgeworth Box’ diagram, named after him, which
relates to two-person bargaining situations and involves a simple model of social utility.
However, psychology was in its infancy at this time as an academic discipline, and many
economists wanted the also-new science of economics (then still largely referred to as
political economy) to aspire
to a more rigorous grounding, comparable to that of the
natural sciences. Hence the birth of the concept of
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