Less Nudge, more prospect theory

Etinosa Agbonlahor

I’m often asked for recommendations on behavioural economics and behavioural science resources that provide a theoretical introduction to the field for beginners (less Nudge more prospect theory). I typically recommend any of the three ‘papers’ below, and thought it was finally time to document these recommendations. I think of the below as foundational in the sense that they cover a broad spectrum of behavioural science theory and are relatively accessible. There is, naturally, much overlap between the papers.

1. Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk – (Starmer, 2000)
A seminal review of the theories that influenced the formalisation of behavioural economics. Moving from expected utility theory to cumulative prospect theory and beyond, Starmer traces the violations of classic economic theories about decision-making under risk that led economists to develop theories taking psychological parameters into consideration (moving from how people should behave to how people actually behave). Here’s the abstract: “Since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways. Considerable research effort has now been devoted to the project of developing a superior descriptive model. Following an overview of non-expected utility theories which distinguishes between "conventional" and "non-conventional" approaches, the paper seeks to assess these alternative models in terms of empirical success (using laboratory and field data) and theoretical usefulness. The closing sections reflect on some new directions emerging in this literature.”

2. An Overview of the Behavioural Sciences (Soman, 2014)

Soman provides a comprehensive overview of applied behavioural sciences, focusing on key topics within the field—heuristics, framing and mental accounting, dual process theories, group and agent-based models, as well as the influence of context in decision making. He also briefly covers some tools used by practitioners (you’ll note a distinct lack of glossy lists of behavioural biases). From the introduction: “Perhaps one of the more fundamental questions tackled by social scientists related to the motivation behind human behavior is the processes used to make decision. Indeed, a large and sprawling literature on the Behavioural Sciences (sometimes referred to as Judgment and Decision Making [JDM] or Behavioural Economics [BE]) investigates these very questions and is the subject of the present paper. The present paper focuses on topics of interest to the Public Policy-Oriented Consumer Interest Research (PPOCIR) community, as part of an initiative to provide a survey of state of the art research in various PPOCIR sub-disciplines.”

As an aside, Soman’s The Last Mile is also a worthy read.

3. Precis of Simple Heuristics that Make Us Smart (Todd & Gigerenzer, 1999)

I’m currently reading Gigerenzer’s Risk Savvy and consider it one of the best books I’ve read in 2020. Although Gigerenzer’s arguments about the usefulness of heuristics tend to be pitted against strawmen (most people would agree that heuristics make decision-making more efficient), his and Todd’s research document a range of heuristics—focusing (in their words) on “how real minds make decisions under constraints of limited time and knowledge.” Whenever I think about Gigerenzer’s research, I’m reminded of Markowitz who, despite winning the Nobel prize for his mean-variance analysis which optimised asset allocation based on risk preferences, actually followed a much simpler 1/N rule in his own portfolio (allocating equally across funds). Gigerenzer’s research makes a powerful case for the efficiency (and pure elegance) of simple solutions—one all applied behavioural scientists will do well to remember.