Popular information Popular Science Background: Easy money or a golden pension? Integrating economics and psychology (pdf) Populärvetenskaplig information: Snabba cash eller god pension? Att integrera ekonomi och psykologi (pdf) KUNGL. VETENSKAPS- AKADEMIEN THE ROYAL SWEDISH ACADEMY OF SCIENCES Easy money or a golden pension? Integrating economics and psychology The American economist Richard H. Thaler is a pioneer in behavioural economics, a research field in which insights from psychological research are applied to economic decision-making. A behavioural perspective incorporates more realistic analysis of how people think and behave when making economic decisions, providing new opportunities for designing measures and institutions that increase societal benefit. Economics involves understanding human behaviour in economic decision-making situations and in markets. People are complicated beings, and we must make simplifying assumptions if we are to build useful models. Traditional economic theory assumes that people have good access to information and can process it perfectly. It also assumes that we can always execute our plans and that we only care about personal gain. This simplified model of human behaviour has helped economists to formulate theories that have provided solutions to important and complicated economic problems. However, the discrepancies between theory and reality are sometimes both systematic and significant. Richard Thaler has contributed to expanding and refining economic analysis by considering three psychological traits that systematically influence economic decisions - limited rationality, perceptions about fairness, and lack of self-control. Limited rationality It is not realistic to assume that people, before each economic decision, consider every feasible alternative and all its long-term consequences. This is quite simply an insurmountable task, so decisions are often taken using a narrow focus. Economics
Laureate Herbert Simon developed the concept of bounded rationality - limited rationality - as a collective term for organisations' and people's cognitive limitations and simplified decision-making rules. One example of such limitations is found in Richard Thaler's theory of mental accounting, which describes how people organise, formulate, and evaluate financial decisions. We tend to simplify such decisions by creating separate accounts in our minds, making individual decisions on the basis of their effect on each of these accounts rather than on our total assets. One example is how many people divide their household budget into one account for household bills, another for holidays, etc., with rules that prevent using money from one account to pay for something in another. This behaviour sometimes leads to extra costs, such as not using money from long-term savings accounts for short-term needs, instead taking out expensive consumer loans. At the same time, this can help us to plan our finances and protect long-term savings. Another element of mental accounting is that we use reference points to help us make decisions. These differ from situation to situation, i.e. between different mental accounts. One reference point could be the price for which we bought an item, or the lowest price we find when searching on the internet, and we use this reference point to assess whether we have made a "good deal". In his research,