Explorations in Behavioral Economics: Realism, Ontology and Experiments

University dissertation from Department of Economics, Lund University

Abstract: This thesis explores Behavioral Economics in terms of realism, ontology and experiments. In the introductory chapter descriptions of "Behavioral Economics", "realism" and "ontology" are offered. In the following three chapters meta-theoretical analyses are performed, while the fifth and last chapter is a report of an experiment but with a meta-theoretical undertone. In Chapter 2 two recent survey articles on Behavioral Economics are meta-theoretically analyzed. Besides appropriately introducing the area, they also offer short, meta-theoretical motives in favor of Behavioral Economics, often in comparison to Neoclassical Economics. Given the circumstances, their argumentation is found to be acceptable, but from a general point of view the motives must be complemented (especially their use of the term "realism"). An alternative motive is presented, in line with the meta-theoretical beliefs expressed in the articles and with the help of Uskali Mäki's ontological research on the way the world works (www). This is a motive that will work for both Behavioral and Neoclassical Economics. Chapter 3 deals with the formalization of Herbert A. Simon's bounded rationality, which contains, among other things, an aversion to portraying the individual as a maximizing decision-maker. The primary question addressed in this chapter concerns the reasonability of using today's common optimization techniques when formally modeling Simon's bounded rationality. A meta-theoretical analysis, emphasizing ontological aspects, finds that this kind of formalization is fundamentally inappropriate. Also, the question of why formalize Simon's bounded rationality at all is addressed. This paper argues that this theory can be a good example of using formalizations advantageously. In Chapter 4 two articles contributing to the experimental research on incomplete contracts are meta-theoretically analyzed with respect to what they really do (i.e., the characteristics of the experiments), and their argumentations. Especially interesting is their use of "firms" and "workers" although their experiments are performed on students. The meta-theoretical framework emphasizes the interaction between the items we want to explain, and the items by which we explain. The conclusion reached is that their use of "firms" and "workers" will result in meta-theoretical difficulties and is inappropriate. Chapter 5 consists of an experimental analysis of the financial decision-making of laypeople. An experiment on 284 students, a large majority of whom had modest financial knowledge, was conducted. The participants chose stocks from the Stockholm Stock Exchange that they wanted to invest in most and least. The main result was that the participants made reasonably good financial decisions compared to the market index. Especially high returns were the result when the participants chose the stocks they least liked to invest in. However, general conclusions at this stage should be drawn with caution and replications are needed, probably with more in-depth experimental techniques.

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