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American Economic Review: Vol. 103 No. 3 (May 2013)

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An Approach to Incorporating Psychology into Economics

Article Citation

Rabin, Matthew. 2013. "An Approach to Incorporating Psychology into Economics." American Economic Review, 103(3): 617-22.

DOI: 10.1257/aer.103.3.617

Abstract

This article proposes an approach to improving the psychological realism of economics while maintaining its conventional techniques and goals--formal theoretical and empirical analysis using tractable models, with a focus on prediction and estimation. Besides tolerating the imperfections that come with precision, models should aim for two crucial criteria: power and scope. The approach advocated is to develop portable extensions of existing models that embed preexisting theories as parameter values, while introducing the new psychological assumptions as alternative parameter values, and make the model portable by defining it in all cases where existing models make predictions.

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Authors

Rabin, Matthew (U CA, Berkeley)

JEL Classifications

A12: Relation of Economics to Other Disciplines
D03: Behavioral Economics: Underlying Principles


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