Introduction to Behavioral

domain
of 
application
which comprises those phenomena that it seeks to explain. There is also 
a 
domain of validity
, the range of phenomena for which the model offers a valid 
account or explanation. The traditional domain of the standard model, ranging over 
all economic decision-making, is vast. The limitations listed here all indicate that its 
domain of validity may be much smaller than its traditional domain of application. 
Whether and to what extent alternative models from behavioral economics are able 
to offer complementary and even competing accounts of decision-making, depending 
on whether their domain of validity overlaps with or extends to the original domain 
of the standard model, is one of the most hotly debated questions in economics today 
and it has, as we shall see, a long and distinguished trajectory in the history of the 
discipline.
1.2 History and evolution of behavioral economics
As we will see, behavioral economics fi nds its twentieth-century origins in various 
empirical critiques of the standard neoclassical model of economic decision-making. 
That model itself only came to dominate the discipline as economics gradually severed 
its traditional ties to psychological, sociological and historical inquiry. An instrumental 

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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