Rethinking Behavioral Economics Through Fast-and-Frugal Heuristics

The goal of behavioral economics is to develop models that extend the explanatory and predictive power of economic theory, to address violations of expected utility theory, and to account more realistically for individual choice behavior that does not adhere to calculative rationality. In mainstream behavioral economics, two defining practices have been to list so-called cognitive fallacies and to extend existing expected utility models by adding parameters to account for behavioral factors. Both practices have met their limits. Many cognitive fallacies have been shown to be most likely error on the part of researchers, and adding parameters has been shown to improve fitting but not necessarily the predictive power of the revised utility model. In view of this situation, we review fast-and-frugal heuristics as an alternative vision of behavioral economics that leads to testable process models with superior predictive power. Such a theory satisfies Herbert Simon's criteria of developing process models rather than as-if Bernoulli functions, deals with genuine uncertainty rather than reducing uncertainty to calculable risk, and postulates ecological rather than logical rationality