What to Conclude from Psychological Experiments: The Contrasting Cases of Experimental and Behavioral Economics

To understand the relationship between experimental and behavioral economics, we need to go back to the late 1970s and early 1980s. In the 1970s, psychologists began conducting new kinds of experiments, the results of which seemed to falsify the assumption of rational individual behavior. This compelled experimental economists to stake out a position for the economics discipline regarding the results. Much to their surprise, their experiments corroborated the results of the psychologists. This led them to completely discard preference theory but at the same time to emphasize the role of the market as the mechanism that rationalizes individual behavior. An initially diverse and unorganized group of financial and other economists drew very different conclusions from these same experimental results. They saw them as proof of observed anomalies in financial markets and hailed Daniel Kahneman and Amos Tversky's prospect theory as the most important candidate for replacing the traditional microeconomic model of human behavior.