Economic Psychology

Economic psychology is the study of phenomena common to the disciplines of economics and psychology. Perhaps because economic psychology has such a potentially enormous and rather poorly defined domain, while the term is frequently used in Europe, it is not much used in the United States. In the United States, the subject area exists. Indeed, it is flourishing. However, the study is embraced by the slightly narrower overlapping areas of judgment and decision making, behavioral economics, and consumer research. Industrial and organizational psychology, which mainly studies psychological processes in the employee, is frequently taken as outside the area, although there are a number of common threads.

The disciplines of economics and psychology overlap in a host of different ways, but economic psychology has mostly been concerned with understanding the psychological and behavioral processes that underlie—and, at least at the individual level, appear to produce—economic behavior and phenomena. The majority of the economic phenomena studied to date have related to the consumer market, but there has also been attention paid to the capital and labor markets. There has also been considerable research into the psychology of government actions in the economy. Some psychological aspects of government-provided services are described in more detail subsequently. In general, economic psychology has always been closely linked to the psychology of the consumer, and even where economic psychology appears to depart somewhat from the traditional concerns of consumer psychology, the research has important implications for our understanding of consumption. Some explicit examples of this are discussed in later sections.

Traditionally, economics has been mainly oriented toward producing mathematical theories, while psychology has focused more on developing experimental and other empirical methods. Thus, to some extent, economic psychology has entailed using methods developed within psychology to test theories developed by economists. However, it would be a vast oversimplification to define economic psychology as an attempt to put together economic theoretical sophistication with psychological methodological expertise. Economics has long had its own traditions of empirical data gathering, and recent [Page 495]years have seen both more data gathered and the development of new empirical techniques, such as the growth of experimental economics. On the other hand, there is also a long history of psychological theorizing, and even of mathematical theories of psychology. In consequence, cross-fertilization between economics and psychology has sometimes been at the more purely methodological or theoretical levels. For example, the economist Bruno Frey's book Not Just for the Money: An Economic Theory of Personal Motivation (1997) takes a theory that was originally developed in psychology of how personal motivation can be undermined by extrinsic rewards and shows how this theory can be used to encourage blood donation or raise a community's environmental consciousness. As a second and different example, both psychology and economics have long been concerned with what it means to measure concepts such as utility, and work on mathematical theories of measurement can be found and cross-referenced in both psychological and economic journals.