Mechanism in behavioural economics

ABSTRACTBehavioural economics promises to bring economics closer to being evidence based. However, its ability to do this may depend on a methodological issue: whether the findings of behavioural economics are used to modify or extend standard theory, or to contribute towards replacing it where required – respectively the incremental and selective replacement strategies. I focus on the incremental approach, in terms of its implied causal mechanism. Two stages are involved, corresponding to the prediction of standard theory and to a separate component that aligns it with actual observations. In behavioural economics, one possible interpretation of the language of ‘biases’ is such a two-stage approach. More explicitly, Rabin advocates it in the form of PEEMs (Portable Extensions of Existing Models). A more direct, one-stage approach may have some advantages, at least for some research topics.