We all know that our actions are not always based on logical reasoning and premise. Therefore, the fact that so much economic theory is based on the assumption that most people act rationally is bound at times to be limited, inadequate, and imprecise. It is only within the past thirty years that economists have begun to rise to the challenge of including psychological insight within their economic theories in order to better understand irrational influences on the way economies operate.
In reality, behavioral economics is even older than that. According to the editors, it actually "rekindles an interest in psychology that was put aside when economics was formalized in the latter part of the neoclassical revolution." Early theorists such as Adam Smith were quite occupied with the effect of human foibles on economic actions. Only with the advent of psychology as a distinct field of study in the 20th century did economists begin to distance themselves from analysis of the less-rational aspects of behavior, leaning towards a more exacting scientific approach. Classical theorists such as John Maynard Keynes certainly appreciated the effects of behavior, but after World War II such broad views languished, not to really reappear until the early 1970s.
Psychology plays a major role in many familiar economic concepts, but often has not been considered as part of the analysis. As an example of this, Advances in Behavioral Economics points to the distinction between short-run and long-run price elasticity. Human behavior certainly has an influence in determining the long-run price since its value is determined by the "time it takes for markets to adjust, or for consumers to learn new prices after a demand or supply shock." The psychological factors that play a role in time adaptation to these changes are certainly there, but economists have not tended to analyze these factors explicitly.
Although geared to an academic audience and not always a straightforward read, this book collects a fascinating assortment of readings connected to behavioral economic theories. After providing a detailed introduction to developments in this field, the succeeding chapters are a compilation of every major recent article that has come out on this topic, from views on diverse concepts such as risk aversion and the timing of economic choices to behavioral finance where economists attempt to anticipate and analyze the irrational aspects of the markets. Chapters such as "Mental Accounting, Saving, and Self-Control," "Money Illusion," "Do Investors Trade Too Much?" and "Out of Control: Visceral Influences on Behavior," show how many angles of the topic are covered. They may draw you in as you recognize different aspects of your own less-than-perfectly-rational approach to life.Ann Cullen