Rebuilding the Boat While Staying Afloat: The Modeling Challenge for Behavioral Economics
Published 8/1/2006
Author: Drazen Prelec
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Executive Summary
The author comments on the article “Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics,” by Ho, Lim and Camerer, which illustrates the usefulness of the new behavioral economics approach to marketing with six theoretical “case studies.” Each case study describes a new model of consumer behavior or competitive marketing interactions that departs from the rationality assumptions that are standard in economics. The models are inspired by experimental research showing how people systematically violate the economics assumptions. Usually, the degree of nonrationality is captured with a single parameter, which facilitates empirical testing and segmentation.
The author raises two general questions about such behavioral economic models. The first question is, Should the assumptions of the models be taken as psychologically realistic? He argues that behavioral economists are ambivalent about this point, sometimes claiming psychological realism or plausibility as a necessary modeling requirement and other times introducing assumptions purely for modeling convenience. The second question is, Will the impact of behavioral economics on marketing be felt more strongly through the development of new quantitative models or through the exploration of qualitative lessons stimulated by behavioral violations of rationality? The author argues that behavioral economics not only contributes new modeling instruments, but, through its documentation of rationality violations or “anomalies,” can provide a rich source of intuitions and insights into consumer psychology.
Biography
Drazen Prelec is Digital Equipment LFM Professor of Management in the Sloan School at the Massachusetts Institute of Technology, where he has taught since 1991. He received his BA (Applied Mathematics) and his PhD (Experimental Psychology) from Harvard University and has held fellowships at the Harvard Society of Fellows, the Russell Sage Foundation, the Center for Advanced Study in the Behavioral Sciences at Stanford, the Center for Advanced Study, and the John Simon Guggenheim Foundation. His work focuses on marketing research, product development, decision theory, behavioral economics, and neuroeconomics.
J Marketing Research, Volume 43, Number 3, August 2006
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