On the Causes and Consequences of Deviations from Rational Behavior

Traditionally, economists have focused on a rational decision maker - the "homo economicus" - to model human behavior. The observation of various deviations of behavior from the benchmark of optimizing rational decision making has motivated an entire field, behavioral economics. Research in this field has identified a plethora of different, partly distinct and partly interacting, behavioral biases, which are related to cognitive limitations, stress, limited memory, preference anomalies, and social interactions, among others. These biases are typically established by comparing actual behavior against a theoretical benchmark, often in simplistic, unrealistic, or abstract settings that are unfamiliar to the decision makers. Field evidence for behavioral biases among professionals is still scarce, mostly because of the difficulty to establish a rational benchmark in complex real-world settings. Consequently, most contributions focus on documenting a behavioral deviation in one particular dimension. This makes it often difficult to compare the behavioral biases documented in the literature. Moreover, deviations from rational behavior are usually seen as being related to suboptimal performance. However, this connotation often rests on a priori reasoning or value judgments because it is typically even harder or impossible to identify the consequences of deviations from the rational benchmark than the deviations themselves.