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MIT Better World

By Stephanie M. McPherson SM ’11


14.13: Psychology and Economics


Frank Schilbach
Gary W. Loveman Career Development Associate Professor, Department of Economics


From the catalog
Behavioral economics (aka psychology and economics) is a growing subfield that incorporates insights from psychology and other social sciences into economics. The broad goal of these efforts is to make economic models more realistic and to strengthen their predictive power by incorporating previously neglected features such as self-control issues, concern for others, or aversion to losses. This course covers recent advances in behavioral economics by reviewing some of the assumptions made in mainstream economic models and by discussing how human behavior systematically departs from these assumptions.

“It’s refreshing to have this field that addresses a lot of the issues related to the assumptions made in standard economic models, issues that definitely occurred to me when I first learned these models in earlier classes,” says Grace Chuan ’21.

“If I can get students excited about economics while they’re also using some of those insights to understand themselves better and make better decisions in their lives, that’s really exciting,” says Associate Professor Frank Schilbach.

The class

The first two-thirds of the class focuses on the ways in which behavioral economics can provide a more complete picture of human action than classical economics does. “When people think about economics, they often think about money, finance, and the like. But a lot of economics, in fact, is about trying to better understand choices that have important economic and other consequences in people’s lives,” says Schilbach. “It’s really much broader than finance and money. For many such choices, including finance, psychological factors are important, so we need to understand them better.”

Students learn how behavioral economics takes assumptions made by traditional models and bolsters them with insights from other social sciences. These alternative models paint a clearer picture of how people make decisions with economic implications—from personal shopping to policy making.

“We talked about tax salience, for example, and how people’s purchasing decisions change when the tax is incorporated into the price tag,” says Chuan. “These little things can inform policy making.”

Topics in the first two-thirds of the course include:

  • Time preferences: Why do people choose between happiness in the present and in the future? (For example, Fiona Chen ’21—one of the fall 2020 teaching assistants—says people often procrastinate unless they have “commitment devices,” such as a deadline or a friend to hold them accountable.)
  • Risk preferences: How do people make choices in the face of risk?
  • Social preferences: How do people take others into account when making decisions? (This semester, the class discussed this topic in the context of adherence to Covid-19 safety guidelines.)
  • Beliefs: What information and beliefs do people use when making decisions?
  • Non-standard decision making: How much do factors such as someone’s socioeconomic circumstances or the way a choice is framed matter?

In the final few weeks of the course, students explore how behavioral economics is applied to public policy and general well-being in society. For example, one lecture focuses on poverty through the lens of psychology—an area of research for Schilbach.

“I try to understand mental health in the context of poverty and the economic consequences of psychotherapy or any kind of mental health interventions and more broadly the relationship between economic and mental well-being,” says Schilbach.

This work leads students into a unit on happiness and mental health in general, and how better mental well-being leads to better decision making and a happier life. “A lot of students at some point during their time at MIT struggle with mental health issues,” says Schilbach. “The hope is that talking about these issues specifically might encourage some to seek help and try to improve their own mental health.”

In the final lecture, students hear about how behavioral economics applies to gender, discrimination, and identity.

The assignments

Most problem sets (PSETs) in 14.13 require students to work through the quantitative aspects of the alternative economic models covered in lectures. But in fall 2020, with classes online and Covid-19 cases surging, the instructors (this year, Schilbach was joined by Dmitry Taubinsky, assistant professor of economics at the University of California at Berkeley) also devised a PSET designed to bring a little brightness to the students’ week. While covering social preferences and the idea that improving the well-being of others can lead to benefits for all, they asked students to perform a random act of kindness for someone in their lives.

“This problem set was a pedagogical way of trying to teach students about the underlying subject matter, but we were also trying to cheer them up or improve their well-being by helping them do something nice for someone,” says Schilbach.

Before taking action, students were asked to rate how good it would make both them and the recipient feel. Afterward, they reflected on how well they had estimated the emotional impact of the activity. (Most of them had underestimated it, illustrating that people often don’t fully comprehend the effect of their actions on others.)

“It was a very nice and really wholesome problem set,” says Chuan, who used the assignment to reconnect with an old friend. “It just reminded people of their humanity, especially in this very difficult time.”

In addition to problem sets, students also produce weekly memos relating class lectures to something that happened to them during that time. These reveal that many students are already applying what they’ve learned in 14.13.

“I definitely think about time preferences when I’m procrastinating on my work or when I try to plan out my day now,” Chuan says, referring to one of her favorite memos. “I think more ahead, like, ‘Do I actually have the amount of time that I think I do, or am I being naive?’”

And Chen has incorporated behavioral economics into her work in student government. While weighing recommendations for grading policies during Covid-19, for example, she says she considered both the degree to which continuing the letter grading system would act as a commitment device to help students stay on track as well as more nuanced factors.

“Problems arising from Covid-19 have amplified mental health issues for many students, particularly low-income or minority students, which could hurt students’ academic performance through negative effects on their attention or productivity. As a result, maintaining a regular grading scheme under Covid could reproduce many social inequities,” she said.

Ultimately, Schilbach hopes students continue to use what they learn, not just in economics but as a guide to improve their decision making and increase happiness in their lives.

“If I had to say what I want students to take away,” he says, “I would like them to be more deliberate and more thoughtful about the choices and decisions that they make and consider how that might improve their well-being.”