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2009 Year
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Behavioral Economics

Ted O’Donoghue, Economics O’Donoghue
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How Do We Incorporate Psychology into Economics?

What Is Behavioral Economics?

Behavioral economics is an applied science that incorporates ideas from psychology into economics. Traditional economics completely ignores the psychology of decision making. Instead, it assumes a rational-actor model: people care only about themselves; they know exactly what they want; they always maximize what they want. Most economists recognize that this model is not accurate, but it provides a good principled methodology that can be used quite broadly.

A large literature in psychology, however, studies human judgment and human decision making. This literature documents many ways in which the rational-actor model is systematically inaccurate. Behavioral economics starts with these ideas. It then investigates how modifications to the standard rational-actor model might alter important economic conclusions.

Immediate Gratification

A major area of my research incorporates self-control problems into economics. A standard assumption of economics is that when you make choices at multiple points in time, you will be “time consistent”: if you want to do something in the future, you will still want to do it when it is time to carry it out. To illustrate, I often give the following example: if I want to work on a problem set next Saturday rather than next Sunday, when next Saturday arrives, I will still want to work on it then rather than the next day. This is a standard assumption of economics.

But a lot of evidence from psychology says instead that people have a preference for immediate gratification. When thinking about the future, you want to behave patiently, but when it comes time to carry out those plans, you indulge in immediate gratification. In my example, when Saturday arrives, my preference for immediate gratification makes me not want to do the problem set now, and thus I decide to delay doing it until Sunday.


I have spent a lot of time studying this type of procrastination. A preference for immediate gratification can generate a continual procrastination, where you repeatedly plan to do something in the near future, but when it comes time to carry out the plan, you decide to do it a little later yet. If a person does this again and again, the result can be severe delay. This conclusion highlights how immediate gratification could have major implications for individual well-being. While any one of these decisions to delay may not do much harm, if you do it over and over again, it could sum up to a lot of damage.

In follow-up work, I study which types of situations are more likely to generate severe procrastination. For instance, consider situations in which you not only choose when to work on something, but you also choose how much effort to exert. You could put in a little effort for a small reward, or you could put in a lot of effort for a big reward. Procrastination might be quite likely in such situations. If your only option is to put in small effort for a small reward, you might just do it right away. But if you also have the option to put in large effort for a large reward, you might decide that this is what you really ought to do. Unfortunately, when you plan to put in a lot of effort, a preference for immediate gratification creates a strong urge to delay that effort until later. This starts the cycle of procrastination.

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