Behavioral Economics Guide

Conduct behavioral economics research using experimental methods, prospect theory, nudge frameworks, and key empirical tools for studying decision-making under bounded rationality.

Core Theoretical Frameworks

Prospect Theory (Kahneman & Tversky, 1979)

People evaluate outcomes relative to a reference point, with losses looming larger than equivalent gains:

Key features:
1. Reference dependence: Utility is defined over gains and losses, not absolute wealth
2. Loss aversion: lambda ≈ 2.25 (losses hurt ~2.25x more than equivalent gains)
3. Diminishing sensitivity: Marginal impact decreases as you move away from reference
4. Probability weighting: Overweight small probabilities, underweight large ones

Value function:
v(x) = x^alpha            if x >= 0  (alpha ≈ 0.88)