Microeconomics: Theory and Applications with Calculus, 4e

16.5 Behavioral Economics and Uncertainty

In the expected utility model, as in the standard utility model, we assume that people make rational choices (Chapter 3). However, many individuals make choices that are inconsistent with the predictions of the expected utility model. Economists and psychologists explain some of these departures from the predictions of the expected utility model using behavioral economics. Researchers have established that some people have difficulty determining probabilities or making probability calculations. Through experiments, they’ve shown that many people behave differently under certain circumstances than others. New theories have been developed to explain behavior that is inconsistent with expected utility theory. ...