New Lessons from Behavioral Economics

Behavioral economics arose as a discipline out of the actions and experiences of the Great Depression generation.

Individuals living during the Great Depression, and particularly the “Depression babies” who grew up during the crisis, faced financial chaos, economic scarcity, and social malaise. The Depression transformed an entire generation’s financial, investment, and spending choices. For economists, the Great Depression disrupted the conventions of macroeconomics and of fiscal and monetary policy, ushering in the discipline of behavioral economics in the 1960s.

Psychologists Daniel Kahneman and Amos Tversky published the first paper on behavioral economics that discussed the “prospect theory.” This states that individuals make decisions that tend to inflate small risks while...