The evolution of behavioral economics: From moral philosophy to modern behavioral science

Behavioral economics, which relies heavily on ideas from psychology, questions the assumptions of strong rationality in traditional economic theory and expands what economists analyze when they study economic decision-making. This article presents an overview of the intellectual and methodological development of behavioral economics as a discipline, from eighteenth-century moral philosophy to George Katona and Herbert A. Simon's "old" behavioral experiments, finally to behavioral economics of the "new" type that is connected with Daniel Kahneman, Amos Tversky, Richard H. Thaler, Vernon L. Smith, and Robert J. Shiller. Merging a historical and analytical approach, this article reviews the development of the concepts of bounded rationality, heuristics, prospect theory, experimental methods, behavioral finance, and behavioral public policy in economic choice analysis over time. It concludes that behavioral economics is not going to substitute the standard economic analysis with its own, but rather that the latter is complemented by the former, through the latter incorporating cognitive constraints, reference dependence, social preferences, and the role of the context in economic analysis.