Economics and Psychology in the Twenty-first Century

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Cambridge Journal of Economics 2005, 29, 909–926
doi:10.1093/cje/bei077

Economics and psychology in
the twenty-first century

This paper begins by exploring four different possible forms of relationship between economics and psychology, which have different connotations in terms of the relative status of the two disciplines. It then focuses on the future for one of these, psychological economics. After setting out the hardcore axioms and positive and negative heuristics of a research programme in psychological economics, it explores institutional and psychological barriers to the success of such a research programme in the context of both research and teaching. Key words: Psychological economics, Behavioural economics, Bounded rationality, Scientific research programme JEL classifications: A12, A14, A20

1. Introduction
First impressions of the relationship between economics and psychology might be taken to imply a rosy future of collaboration between the two disciplines. Consider the following indicators:
Work at the interface between the two fields has been recognised with two Bank of Sweden Prizes in Economics in Memory of Alfred Nobel: Herbert Simon (in 1978) and Daniel Kahneman (in 2002, jointly with experimental economist Vernon Smith). There is no comparable award in psychology.

Interest in psychological aspects of choice was evident over two centuries ago in the work of Adam Smith, particularly in The Theory of Moral Sentiments (1759) and his ‘history of astronomy’ (1795 (which addresses the issue of paradigm shifts), rather that in his Wealth of Nations (1776). Around the same time, David Hume (1739/ 1978, 1875, 1955) assigned major roles in the choice process to passions, stubbornness and desires for action and liveliness, as well as more obviously ‘economic’ motives such as desires for consumption and gain. Manuscript received 7 January 2004; final version received 4 January 2005. Address for correspondence: School of Economics, University of Queensland, St Lucia, Brisbane, QLD4072, Australia; email: p.earl@economics.uq.edu.au

* University of Queensland. This is a substantially revised version of a paper presented at the ‘Economics for the Future’ conference organised by this Journal in Cambridge, 17–19 September 2003. I am most grateful to two anonymous referees for their numerous excellent suggestions, as well as to participants at the conference; however, the usual disclaimer applies. Ó The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

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Peter E. Earl*

910

P. E. Earl

Despite this, the future of the relationship between the two disciplines remains debatable. In this paper, I examine what economics might look like if it wholeheartedly embraced psychology, but I then explore barriers to the achievement of this, initially in the context of academic research, and then in the context of teaching. First, though, it is necessary to address in general terms the different forms that the relationship between economics and psychology may take.

2. Economics and psychology: partnership or imperialism?
Whenever the relationship between economics and psychology is considered, it is difficult to ignore the issue of the appropriate adjective–noun order to assign: shall we call the synthesis economic psychology or psychological economics? IAREP and its Journal chose the former but, in practice, deal with both combinations. In terms of normal human psychology, however, the issue of the predominant direction of the relationship is by no means trivial, owing to its connotations in terms of social science

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The literature bringing the two disciplines together dates back at least to 1881 and has grown rapidly in the last 30 years (Coats, 1976,...
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