Cognitive Economics Definition Taking seriously data other than

Cognitive Economics • Definition: Taking seriously data other than actual choices in the wild. • Must be linked back to actual choices in the wild. • Analogous to Cognitive Psychology vs. B. F. Skinner. • Complementary to Behavioral Economics, since loosening the constraints on the utility function raises the value of additional data. 1

Examples of Cognitive Economics • • Experimental Economics. Neuroeconomics. Survey measures of expectations Survey measures of the implicit theories people have of how the economy works • Survey measures of preference parameters based on hypothetical choices. • Happiness research. 2

Theoretical Orientation Cognitive Economics looks for explanations in this order: 1. Standard economic explanations. 2. Bounded cognition—people having finite IQ’s 3. Exotic preferences * By contrast, in practice, much of the research in Behavioral Economics has reversed the order of (2) and (3), going very quickly to explanations based on exotic preferences. 3

Why theoretical orientation matters Notes: 1. Explanations based on bounded cognition imply that even in the absence of externalities, welfare can often be improved by economic education, setting up appropriate default choices for people, or providing disinterested, credible advice. 2. Explanations based on exotic preferences imply that individuals are already maximizing, so that welfare improvements must come from dealing with externalities. 4