The arrival of behavioral economics: from Michigan, or the Carnegie School in the 1950s and the early 1960s?

Abstract The essay discusses the rise of (modern) behavioral economics during the last few decades. In contrast to Louis Uchitell’s assertion, in his Feb. 11, 2001, NY Times essay, that behavioral economics began in 1994, I would try to argue that it began during the 1950s and early 1960s, although some aspects of it had even emerged in the works of Marshall, Wesley Mitchell, J.M. Clark and others, before WWII. Although contributions of many writers have helped the rise of behavioral economics including psychologists Kahneman and Tversky, I regard the works of George Katona and Herbert Simon instrumental in its rise. While the works of Katona and his colleagues at Michigan University led to the use of survey method in economics and its utilization in measuring the impact of consumer expectations on macroeconomic activity, the work of Simon at Carnegie Tech.(a tremendously stimulating intellectual environment for economic theorizing then) resulted in the important theoretical foundations of behavioral economics, such as the concept of bounded rationality. Interestingly enough, that stimulating environment also led to the many contributions of Franco Modigliani, M. Miller, and others, and the start of the rational expectations hypothesis by John Muth—a student of Simon and Modigliani. The essay also provides the characteristics of behavioral economics, which include the utilization of the theoretical findings of psychology and other social sciences; its concentration on real observed behavior of economic agents; its rejection of the simplistic model of rational maximizing agents and its replacement with Simon’s bounded rationality; and its emphasis on the utilization of an indisciplinary approach in economics.