Cambridge Journal of Economics 2005, 29, 909–926

doi:10.1093/cje/bei077

Economics and psychology in

the twenty-first century
Peter E. Earl*

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This paper begins by exploring four different possible forms of relationship
between economics and psychology, which have different connotations in terms
of the relative status of the two disciplines. It then focuses on the future for one
of these, psychological economics. After setting out the hardcore axioms and
positive and negative heuristics of a research programme in psychological
economics, it explores institutional and psychological barriers to the success of
such a research programme in the context of both research and teaching.

Key words: Psychological economics, Behavioural economics, Bounded ratio-

nality, Scientific research programme
JEL classifications: A12, A14, A20

1. Introduction
First impressions of the relationship between economics and psychology might be
taken to imply a rosy future of collaboration between the two disciplines. Consider
the following indicators:
Work at the interface between the two fields has been recognised with two Bank of
Sweden Prizes in Economics in Memory of Alfred Nobel: Herbert Simon (in 1978)
and Daniel Kahneman (in 2002, jointly with experimental economist Vernon
Smith). There is no comparable award in psychology.
Interest in psychological aspects of choice was evident over two centuries ago in the
work of Adam Smith, particularly in The Theory of Moral Sentiments (1759) and his
‘history of astronomy’ (1795 (which addresses the issue of paradigm shifts), rather
that in his Wealth of Nations (1776). Around the same time, David Hume (1739/
1978, 1875, 1955) assigned major roles in the choice process to passions,
stubbornness and desires for action and liveliness, as well as more obviously
‘economic’ motives such as desires for consumption and gain.

Manuscript received 7 January 2004; final version received 4 January 2005.

Address for correspondence: School of Economics, University of Queensland, St Lucia, Brisbane,
QLD4072, Australia; email: p.earl@economics.uq.edu.au
* University of Queensland. This is a substantially revised version of a paper presented at the
‘Economics for the Future’ conference organised by this Journal in Cambridge, 17–19 September 2003.
I am most grateful to two anonymous referees for their numerous excellent suggestions, as well as to
participants at the conference; however, the usual disclaimer applies.
Ó The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy
Society. All rights reserved.
910 P. E. Earl
The literature bringing the two disciplines together dates back at least to 1881 and
has grown rapidly in the last 30 years (Coats, 1976, 1987; Lewin, 1996; van Raaij,
1999). It is now substantial enough to have led to the publication of survey articles
(Earl, 1990; Rabin, 1998, 2002), major handbooks (van Raaij et al., 1988; Earl and
Kemp, 1999) and collections of reprints of significant articles (for example, Maital
and Maital, 1993; Earl, 2001A), as well as many monographs, edited books and
conference volumes.
A well-established academic group, The International Association for Research in
Economic Psychology (IAREP), runs annual conferences and summer schools.
IAREP historically has had a European focus, but increasingly has a global reach. It

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also oversees the Journal of Economic Psychology, which published its twenty-fifth
volume in 2004 and now runs to six issues a year. Moreover, there are related
academic associations, such as the Society for the Advancement of Socio-
Economics and the Society for the Advancement of Behavioural Economics and
other economics journals that welcome papers with psychological underpinnings,
such as The Journal of Socio-Economics and The Journal of Economic Behavior and
Organisation. In the US, the Russell Sage Foundation has run ‘summer institutes
for behavioral economics’, bringing together leading US contributors (though with
almost no overseas representation).
Research on psychologically based departures from traditional economic notions of
rational behaviour has been given significant media attention, as has the hiring of
behavioural economists by departments of economics in some high-ranking US
universities. Most notable here are a pair of New York Times articles on 11 February
2001 by Uchitelle and Lowenstein. (It should be noted, however, that such
coverage, in focusing on scholars such as Richard Thaler and David Laibson,
curiously failed to acknowledge earlier work by Herbert Simon—who had died
on 9 February 2001—and the Carnegie school from the 1950s onwards. It also
failed to mention the long-standing European tradition of research in economic
psychology and many designated economic psychology positions or even, in The
Netherlands, entire departments of economic psychology at some universities.
A similarly misleading picture is evident in Rabin (2002).)
Despite this, the future of the relationship between the two disciplines remains
debatable. In this paper, I examine what economics might look like if it wholeheartedly
embraced psychology, but I then explore barriers to the achievement of this, initially in
the context of academic research, and then in the context of teaching. First, though, it
is necessary to address in general terms the different forms that the relationship
between economics and psychology may take.

2. Economics and psychology: partnership or imperialism?

Whenever the relationship between economics and psychology is considered, it is
difficult to ignore the issue of the appropriate adjective–noun order to assign: shall we
call the synthesis economic psychology or psychological economics? IAREP and its
Journal chose the former but, in practice, deal with both combinations. In terms of
normal human psychology, however, the issue of the predominant direction of the
relationship is by no means trivial, owing to its connotations in terms of social science
 Economics and psychology in the twenty-first century 911
imperialism. In other words, economists and psychologists may have quite different
attitudes to such a synthesis, depending on whether their discipline dominates within it.
A mainstream economist, such as Gary Becker, might be said to be doing economic
psychology when taking topics that psychologists have seen as their preserve rather
than that of the economist—such as suicide, addiction, human relationships, trust and
anti-social behaviour, the allocation of attention, and difficulties people have in
adjusting to change—and modelling them as problems of constrained optimisation or
in game-theoretic terms. A psychologist, likewise, might be said to be doing economic
psychology when, say, applying economists’ notions to the design of incentive systems
for changing the behaviour of children, or for making sense of human and animal

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responses in experiments in behaviourist (operant conditioning) psychology. In both
these kinds of cases, it is the domain of economics that is spreading, so it could be
claimed that the kind of economics employed is a progressive research programme.
This puts psychology in a rather subordinate role.
The reverse combination, psychological economics, has often been used as a term
synonymous with behavioural economics, but caution needs to be exercised here.
Some of the psychology that may be useful to economists can be very theoretical rather
than driven by studies of actual behaviour, while behavioural research in economics is
not always informed by psychology or interpreted in relation to it. (Note that
behavioural economics should not be seen as necessarily being based on behaviourist
psychology of the operant conditioning kind, though some of it is: see, for example,
Foxall, 2003). Unlike economic psychology, psychological economics entails a chal-
lenge to approaches to economics that have sought hitherto to limit the use made of
ideas from psychology: it seeks to use inputs from psychology to obtain an enhanced
understanding of, and/or an improved ability to predict, behaviour in respect of areas
that have normally been viewed as the preserve of economics. It offers the promise of
greater functionality for economics, both in terms of accounting for what might appear
from the mainstream perspective to be some kind of analytical ‘failure’ and in enabling
some issues to be analysed more effectively than by postulating rational, representa-
tive agents. An example of the latter is the work of Frey (1997), who explores the
implications of taking a much broader view of motivation than the standard
incentives-focused conception. However, such benefits come at a cost to economists,
who must first get to grips with unfamiliar notions, literatures and research tools.
If economists are not prepared to grasp this opportunity, they run the risk that
psychologists (or, perhaps, consumer researchers from marketing) will do so instead
and displace conventional economics for policy-making purposes.
A third kind of relationship between economics and psychology is a mutually
reinforcing one. For example, while there may indeed be gains to be had from
modelling families in economic terms, things may be better still if one brings variables
such as feelings of obligation into the analysis of choices to have children, and the time
and other resources one invests in bringing them up. As a second example, note that,
while we may try to make sense of economic behaviour with the aid of the theory of
cognitive dissonance (for example, in respect of risk-taking or the treatment of sunk
costs: see Akerlof and Dickens, 1982), we might also seek to improve cognitive
dissonance theory by noting that economising behaviour may be entailed when people
opt to twist their perceptions one way rather than another: some changes of mind are
more difficult to make than others (Earl and Wicklund, 1999).
912 P. E. Earl
These three perspectives entail the coming together of psychologists and economists
or their literatures. However, there is a fourth scenario in which members of both
disciplines opt to forgo such intellectual synergies and instead develop their own
approaches to issues addressed by the other discipline in order to deal with particular
theoretical puzzles. (We might draw a parallel with the literature on industrial
organisation here: this is a case of researchers engaging in vertical integration despite
the possibility for outsourcing to specialist providers of inputs.) This is essentially what
mainstream economists do when they shun psychologists’ ideas on, say, needs and
wants, risk-taking and learning and then construct their own theories of such
phenomena. Economists might get a sense of psychologists doing the reverse if they

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explore Lea et al. (1987) and feel disoriented on discovering that these psychologists
chose to draw supply and demand diagrams in which the dependent variable, quantity,
was on the y-axis in keeping with standard practice in other sciences.
The rest of this paper focuses on the future of psychological economics, and the
issues associated with economists abandoning the idea that they should operate purely
on the basis of psychological notions developed within economics.

3. Psychological economics as a scientific research programme

The methodology of scientific research programmes proposed by Lakatos (1970)
provides a convenient framework for characterising how particular schools of thought
in economics go about their work. It has been employed previously to characterise
mainstream ‘situational determinism’ (Latsis, 1972), the heterodoxy of post-
Keynesianism and neo-Ricardianism (Brown, 1981; Lavoie, 1992) and the subjec-
tivist ‘growth of knowledge’ approach to economics (Harper, 1994). In this section, I
attempt to show what the ‘hard core’ of a research programme in psychological
economics may look like in terms of non-negotiable axioms and ‘do’ and ‘don’t’ rules.
I offer elucidation where it seems necessary. It should be noted that, while the axioms
may be non-negotiable parts of the research programme, some of them have merely
a permissive view of human action (e.g., ‘often people . . . ’ or ‘can sometimes . . . ’)
rather than being restrictive in the manner of mainstream axioms.

3.1 Axiomatic foundations

(1) Opportunity costs and constraints are personally constructed. Action depends on
how decision-makers perceive their situations; it is not situationally determined
(Latsis, 1972). There is abundant evidence in cognitive psychology that people
can see given stimuli in different ways and that they often engage in strategies
such as wishful thinking to reduce cognitive dissonance (Steinbruner, 1974).
(2) Agency has an inherently social nature. This greatly expands the ability of a group
so long as members are sufficiently different and sufficiently similar in appro-
priate dimensions (such as capabilities and perceptions about what ought to
be done: cf., Richardson, 1972; Smith, 1759, 1776). However, it can also
have dysfunctional aspects. For example, if people construct their identities and
self-images by comparing and contrasting themselves with others, the result is
likely to be a competitive spiral of choices aimed at defending such constructions
of social status. Duesenberry (1949) explored this in his classic contribution to
 Economics and psychology in the twenty-first century 913
the theory of the consumption function, a work that drew on the social psy-
chology of its time.
The term ‘coevolutionary’ is probably the most suitable one for describing the
methodological thinking here. A focus on how the mind works might initially
appear to imply that psychological economics, like mainstream economics, is
based on methodological individualism, i.e., ‘The view that social theories
must be grounded in the attitudes and behavior of individuals, as opposed to
‘‘methodological holism,’’ which asserts that social theories must be grounded
in the behavior of irreducible groups of individuals’ (Blaug, 1980, p. 266).
However, individuals are social beings in terms of where they get many of

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their ideas about how to think, modes of conduct and how to see their places
in the world (cf., Fullbrook, 2002). The psychological economist’s perspective
thus entails neither methodological individualism nor methodological holism.
(3) Consumer sentiment can be significantly affected by non-economic variables (Katona,
1951). Where consumer confidence is a function merely of conventional
economic indicators, it can be modelled without any recourse to psychology.
Katona’s contention is that other parts of ‘the news’ can make people nervous
or euphoric and produce shifts in aggregate demand that are not implied by
economic variables. His suggestion that the psychological side of expectation
formation operates as an ‘intervening variable’ in the determination of
consumer sentiment has been frequently debated—for a review, see Wärneryd
(1982). This proposition is especially significant in affluent societies where there
is considerable discretionary spending from income—for example, in respect of
the timing of upgrades of consumer durables (Smith, 1975) or adoption of
new products—and widespread access to credit.
(4) Decision-making is normally characterised by bounded rationality (see Conlisk, 1996).
The phrase ‘bounded rationality’ was originally coined by Simon (1957). He
emphasised problems of reaching decisions in the face of far more information
than the mind could process or problems too complicated for the mind to
structure. These forms of bounded rationality are, in practice, made manage-
able in many contexts via specialisation and the division of labour (cf., axiom 2),
not merely within large organisations that deal with very complex tasks (Kay,
1997, ch. 11) but also among consumers who trade expertise with each other
(Earl and Potts, 2004). More recently, writers such as Loasby (1999) and Dunn
(2000) have emphasised that the ability of decision-makers to take high-quality
decisions is often constrained not by information overload but by the in-
completeness of their knowledge. Sometimes such gaps can also be reduced via
the use of complex networks of agents. (This is a major focus of what is becoming
known as ‘cognitive economics’, an interdisciplinary research programme that
brings together theories of learning, complex systems thinking and agent-based
simulations: see Bourgine and Nadel, 2004.) However, filling gaps in knowl-
edge is frequently impossible owing to the required knowledge being that which
concerns technologies that do not yet exist and owing to interdependencies
between decision-makers (for you to take an optimal decision, you need to
know what other agents’ choices are going to be, and vice versa). Paradoxically,
bounded rationality is compounded by the remarkable imaginative capacities of
914 P. E. Earl
people, who frequently cause surprise by creating new products, new ways of
doing business, and new ways of using products, as well as new ways of looking
at the world. This gets in the way of dealing with the interdependence issue in
the mainstream manner by reducing it to the analysis of games with well-
defined rules; it also should ensure that psychological economics is of interest to
those who work at the intersection of evolutionary economics and technological
change.
(5) Choice is a satisficing activity that attempts to meet aspiration levels, but aspiration
levels tend eventually to adjust into line with what seems feasible (see papers collected

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in Earl, 2001A, sections II and IV). In other words, choice is not a profit- or
utility-maximising activity, but rather, as Austrian economists (most notably
Mises, 1949) have long put it, human action is purposive or goal-directed.
Psychology can help us understand which goals decision-makers may be
pursuing and, as the work of Frey (1997) reminds us, as does that of Hume,
two centuries earlier, it is not just money or scope for consumption that
motivates people. This view of choice does not necessarily imply widespread
under-achievement due to a ‘that’ll do’ philosophy. In complex situations with
limited attention to devote to rival tasks, attempts to achieve perfection in any
area may result in nothing being completed and many tasks being completely
neglected. Indeed, a bigger issue in welfare terms may be the frustration and
stress that people feel when aiming higher than they can achieve while being
slow to lower their sights (e.g., in parenting and household maintenance).
(6) Attention cannot be allocated optimally, but what captures a decision-maker’s
attention may have a major impact on choice, and may make it fickle. As Berger
(1989) points out, to imagine a decision-maker pausing to consider the allo-
cation of attention begs the question of how the decision-maker’s attention has
ended up focusing on the issue of attention. This axiom and the previous one
underpin Kirzner’s (1973) Austrian analysis of entrepreneurship in terms of
alertness directed by interest. Some entrepreneurial and empire-building
activities involve attempts to manage the attention of others, as with the setting
of agendas at meetings and via the design of advertisements and shopping malls
(Earl and Potts, 2000). The theory of attention also deserves a place in theories
of conspicuous consumption and fashion, and may be useful for understanding
behaviour conventionally portrayed as evidence of diminishing marginal utility.
(7) Perceptions and judgments under uncertainty are commonly shaped by heuristics and
biases that conflict with mainstream analysis and competent use of statistical
techniques (Kahneman et al., 1982; Nisbett and Ross, 1980). Recognition of
this opens up a normative role for psychological economics in the promotion of
better decision-making techniques (for example, see Gigerenzer, 2002).
(8) Decision-makers are prone to discount the future hyperbolically, not exponentially
(Ainslie, 1992), resulting in problems of addiction and an apparent lack of self-
control.
(9) Choice can be based on reasoning in terms of decision rules and on emotions, but
choices that involve reasoning are impossible without an emotional anchor
(Damasio, 1994). There is no presumption that reasoning will be consistent
 Economics and psychology in the twenty-first century 915
with established mainstream axioms such as transitivity. If we probe more
deeply into a person’s reasoning, sooner or later their emotional core will be
reached, and the person will be unable articulate a basis for why a particular
issue matters to them: it just ‘does’. This aspect of psychological economics is
very much in line with the intuition of Adam Smith and David Hume and it
naturally takes us into the origins of aesthetics (i.e., principles of good taste),
and other customs that underpin many choices, as discussed in Schlicht (1998).
As Smith (1795) noticed, aesthetic considerations can affect switches of
theoretical frameworks: this is a problem area for psychological economics, an
inherently messy approach compared with the beauty of formal general

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equilibrium analysis.
It might be tempting to see a person’s emotional core as operating much like
a preference system in mainstream economics and hence to downplay the
significance of choices based on reasoning with rules. However, in everyday life,
people mostly get by without ‘getting hot under the collar’ because many
choices are determined via procedures that operate without conflicting with
their core values. The situation is analogous to that in an organisation in which
lower-level employees are left to use their discretion in implementing policies
decided at higher level and only occasionally need to refer to their managers to
resolve puzzles.
(10) The forms that decision rules take may vary considerably depending on how decision-
makers see the context of choice. Some choices involve extensive deliberation,
whereas others are achieved by applying very simple proxy rules, such as
those based on brand recognition. Sometimes, decision-makers use intolerant,
check-list/priority-based decision rules; at other times, their choices will be
based upon rules that allow trade-offs, or contingent combinations of both non-
compensatory and trade-off rules. Sometimes, decision rules may be obtained
from other people (Earl and Potts, 2004). In relation to axiom 5 (satisficing)
and axiom 7 (heuristics and biases), it is important to note that in many cases
decision-makers can actually do better by not being ‘rational’ in the mainstream
economist’s sense and instead relying on ‘fast and frugal’ heuristics (Gigerenzer
et al., 1999; Gigerenzer and Selten, 2002).

(11) Decision-makers learn in the sense of changing how they look at the world, but their
ways of looking at the world may limit their ability to change how they see things
(Kelly, 1955; Loasby, 1983). Psychologists themselves have a variety of ways of
looking at learning processes, such as seeing them in terms of conditioning via
reward or punishment, or in terms of systems of rules (contrast Foxall, 1997;
Brenner, 1999).

(12) It is not uncommon for consumer or workplace behaviour to be to some degree patho-
logical in nature. The organisational manifestations of this can be dysfunctional
strategic decision-making (Kets de Vries and Miller, 1988). Some consumers
exhibit extreme forms, such as impulsive spending with little thought to its
consequences (for a review, see Rook, 1999) or obsessive–compulsive behaviour.
Most of us display more minor forms of it in some parts of our lives, where we have
obsessions with and aversions to particular products and activities.
916 P. E. Earl
(13) Choices at the brand/product level are constrained by higher-level lifestyle choices that
are shaped by buyers’ personalities/ways of looking at the world (Earl, 1986;
Albanese, 2002; Caplan, 2003). This implies that patterns of substitution and
elasticities of demand are shaped by perceived patterns of complementarity and
the fit of products with a person’s world-view.
(14) People do not always behave in a selfish manner. Often, their actions are affected by
their beliefs about what is morally right or fair rather than by contractual
obligations (Smith, 1759; Etzioni, 1988).

3.2 Positive and negative heuristics

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 Consider the different ways that individuals choose and, if possible, segment the population
of decision-makers into groups with similar ways of dealing with the situation in question,
rather than employing a representative agent simplification, even when analysing
aggregate, market-level behaviour.
 Reflect on your own way of thinking as a decision-maker about the situation you are
studying (Earl, 2001B), but remember that you may be twisting what you see in
order to reduce cognitive dissonance. This introspective technique is a quite
different kind of ‘arm-chair theorising’ from that in which economists have hitherto
engaged, where the focus was on finding suitable formal axioms for encapsulating
choices in general rather than reflecting carefully on actual instances of choice with
a view to seeing what economics might have missed.
 Do not presume that decision-making subjects will see the world in the way that you do; in
particular, do not presume that what you see as a minor (major) issue will be seen
as a minor (major) issue by your subjects, or that in a game context people will see
the rules of the game as you do.
 Conduct behavioural research to find out how subjects see or have experienced the kind of
situation you are trying to model; failing this, seek to obtain examples from similar
situations by deconstruct relevant text (Hirschman and Holbrook, 1992) from
literature, consumer magazines, press interviews and business history.
 Employ research methods from social science and marketing (Lewis, 1988), such as
questionnaires, repertory grids/construct laddering techniques, protocol analysis and
experimental research, in addition to traditional econometric tools.
 When subjects say a product characteristic is important to them, ensure that you
know whether they mean ‘important’ in terms of a weight or a priority ranking.
 If you cannot uncover decision rules that subjects actually use in the context in
question, consider the implications of diverse plausible rules beyond merely rules that
involve trade-offs.
 Don’t take subjects’ initial explanations at face value; instead, use them as a basis for
probing more deeply into how they see things and why they do what they do.
 Don’t ignore dysfunctional/pathological economic behaviour; instead, seek to uncover
the extent of its significance in the context in question.
 Don’t presume smooth or linear responses to changes in economic conditions.
 View choice as an unfolding process of coping, not as the selection of a particular set of
activities at a point in time. Given the difficulties of trying to work out the ‘right’
 Economics and psychology in the twenty-first century 917
course of action, and the possibility that ultimately their choices are emotional ones,
welfare become less an issue of ‘do people take the right decisions?’ but whether
they are able to ‘make their decisions come right’ (Langer 1989, pp. 199–200).
 Be pluralistic in your use of both economics and psychology. Don’t forget to examine what
mainstream economics has to say about the context in question, as an alternative and
possibly less resource-demanding perspective, and one that may offer scope for
synthesis with a psychological approach. Moreover, since psychology does not have
a monolithic theory akin to general equilibrium theory in economics, examine the
implications of alternative perspectives offered by psychologists on the issue in
respect of which you seek inputs from psychology.

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 Try to feed back into psychology what works and what does not in explaining economic
phenomena. This heuristic (suggested by an anonymous referee) follows the ‘full-
cycle social psychology’ approach of Cialdini (1980) that avoids a unidirectional
application of psychological principles to other problems without taking back into
psychology the evidence that the success or failure of those applications gives about
the reliability or range of applicability of those principles. For an early application of
this heuristic within the economic psychology literature, see Pardini and Katzev
(1987).
In keeping with the pluralistic approach to psychological economics, I do not claim
that these lists of core axioms and research rules are definitive or would be accepted
by everyone who is committed to a psychological approach to economics. But I do
encourage economists to try working with them.

4. The realities of the research environment

The research programme just outlined differs profoundly from that of mainstream
economics where one does not inquire about the origins or fickleness of tastes and
expectations, adopts a very narrow view of rationality and learning, and is suspicious
of behavioural research. Its most radical difference, though, is perhaps its focus on
individual choice with recognition of individual differences rather than a focus on
modelling aggregate behaviour in terms of hypothetical representative agents.
Although it may be based on extensive research and not at odds with the facts,
a psychological approach is unlikely to be welcomed by economists whose existing
research programme it calls into question. The longstanding reluctance of mainstream
economists to accept evidence at odds with expected utility theory is a classic example
of a degenerating scientific research programme. Rabin and Thaler (2001) have
likened it to the classic ‘Dead Parrot Sketch’ in Monty Python’s Flying Circus, but with
one major difference: in the latter case, after a long process of denial based on
ridiculous ad hoc claims, the owner of the pet shop did eventually concede the parrot
was dead. Via such rhetoric, Rabin and Thaler have been trying to force the
mainstream school to concede that their theory needs to be abandoned; only time
will tell whether satirical analogies are any more effective at this than the work of
writers such as Kahneman had hitherto been.
So long as the mainstream paradigm dominates, those who seriously embrace
a psychological approach to economics will probably have a hard time placing in ‘core’
918 P. E. Earl
journals articles that comprehensively depart from it. Instead, what we should mainly
expect, despite the presence of occasional survey articles that suggest major scope for
rethinking the relationship between economics and psychology, is the piecemeal
incorporation of the latter. There are several reasons for this.
First, consider the nature of psychology as a discipline. As already noted, unlike
mainstream economics, it lacks a grand unifying theory. Even within its sub-
disciplinary areas such as personality theory, there are many different approaches.
(Albanese’s (2002) recent weighty book examining their relevance for consumer theory
fails to explore the personal construct theory of Kelly (1955), used by Earl (1986),
Loasby (1983) and by many consumer researchers within marketing.) Fragmentation

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within psychology itself both discourages economists from making an investment in
getting an overview of psychology, and makes its piecemeal use seem legitimate.
Most of all, a piecemeal strategy in which psychology is used as a basis for exploring
the implications of a variation on traditional themes makes it far easier for authors to
convince referees that what they are doing remains both ‘economics’ and compre-
hensible by economists. Skilled technicians, such as Rabin, who are prepared to play
mainstream publication games to get psychological ideas into core journals,
may eventually generate a large enough pool of influential papers for mainstream
economists to get into this interdisciplinary way of thinking. As such a pool
accumulates, so, too, does a pool of referees that editors can feel comfortable to call
upon to examine subsequent papers that have a psychological slant.
Such a process may take a long while and result in a research programme that
still contains elements of mainstream economics that behavioural economists
would see as at odds with what psychological research implies (as with mainstream
models of bounded rationality: see Earl, 2001A, vol. I, readings 10–12). Even so,
piecemeal subversion may achieve more than one-hit presentations of entirely
different ways of doing economics have been able to achieve so far. The latter ask
economists to let go of much that they hold dear, including their identities as leading
figures with superior insight and the right technical capabilities, whereas the former is
much more acceptable in psychological terms, enabling change without loss of face
and status.
This situation presents major strategic problems for authors and journal editors
keen to replace the mainstream hard core by one with psychological underpinnings
and yet who are aware of the increasing role of journal rankings and journal impact
factors in determining academic appointments and promotions. These rating
systems limit the need for committees to get involved in intricate discussions of the
quality of a scholar’s CV based on expert knowledge that some committee members
have of the scholar’s research area. (This approach is fraught with problems within
a discipline such as economics that has a vast number of journals and where there is
considerable instability in impact factors for those journals that are clearly not in the
top tier.)
An obvious way for non-core journals to increase their impact factors would be to
solicit submissions from those who frequently succeed in publishing in core journals
and are likely to cross-reference such work there, leading to its study and further
citation by other leading figures. Success may be limited if such scholars judge that
their work will have a greater impact if published in a mainstream journal with a
wider circulation and if they are indeed concentrating on winning over mainstream
 Economics and psychology in the twenty-first century 919
economists via a strategy of piecemeal change. Another strategy is to get eminent non-
economists whose work brings together psychology and business involved as editorial
board members. This may lead them to submit their own papers, whose citations by
other non-economists will at least help the impact factor. However, this could make
psychological economists worried about not really being seen as economists if they
publish there.
Given these difficulties, a better strategy for journals that seek to promote
interdisciplinary work between economists and psychologists may be to turn away
papers that are basically ‘mainstream economics with a minor psychological twist’. By
making themselves clearly different, they reduces the risk of being seen as inherently

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second-rate (or worse, third-rate), as the home of papers that have a bit of psychology
but are not good enough to command a place in the traditional journals. The
downside, however, is that this strategy limits the readership of journals that practise it
largely to those scholars who habitually work in an interdisciplinary style. Such
a journal is then faced with the task of competing to be the best among similar journals.
Although most economics papers with radically psychological foundations are
unlikely to prove acceptable to the highest-ranking journals, using the research
methods of psychology at least provides evidence to promotion and appointments
committees of a willingness to pursue and sometimes win research grants in order to
undertake experimental or questionnaire-based studies. If grant awarding committees
have a multidisciplinary composition, research proposals that blend economics and
psychology might, other things equal, have a greater chance of winning support than
those cast in terms of more traditional economic methods that may excite fewer
members at the committee table. This process may be assisting the development of
psychological approaches in thriving sub-disciplines such as environmental economics
that have a high public interest and where leading contributors have been interested in
the scope for using psychology to explain attitudes towards environmental issues and to
analyse the results of contingent valuation studies (cf., Spash and Biel, 2002). A
limitation to this scenario arises, however, where grant applicants are being judged on
track records, and these are assessed primarily in terms of counts of papers in core
journals.
The threat that a psychological approach to economics poses to core notions within
the mainstream research programme might appear to imply a greater chance of
seeing it taken up by heterodox economists. The obstacles that psychological econ-
omists face to winning places in elite journals are very much the same as those faced by
radical, institutional and Post-Keynesian economists, and the use of psychological
research may be perfectly compatible with some of these approaches as well as
adding weight to the arguments being made—in the eyes of fellow deviants if not also
in terms of mainstream economists. As an example, consider how Galbraith’s (1958)
The Affluent Society might have fared if its claims about the scope for producers to
subvert consumer sovereignty had been presented with a battery of empirical findings
on the psychology of consumer behaviour. Relevant evidence now exists, and Hanson
and Kysar (1999A, 1999B) have used it to set out the case for a behavioural approach
to law and economics, particularly in the area of consumer protection. So far, however,
few heterodox economists have embraced psychology; perhaps more will do so
following signposts in a recent Journal of Economic Psychology symposium (Fontana
et al., 2004).
920 P. E. Earl
5. Psychological economics and the economics curriculum
If a psychological approach to economics is going to become part of the ‘normal
science’ of economics, it must find a place in the curriculum, not merely in specialised,
advanced level options but within core principles courses and popular electives. In
bringing it to a mass audience, lecturers may find themselves constrained by the
growing McDonaldisation of higher education—that is to say, by the application of
highly programmed, standardised, time-saving principles of the fast-food restaurant to
the teaching in an environment of larger classes and shrinking resources per student
(Ritzer, 2000).

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5.1 The textbook problem
A major ingredient of the McDonaldisation process in higher education has been the
increasing reliance of academic staff and students on comprehensive textbook pack-
ages, the educational equivalent of the weighty McDonald’s franchise manual. The
chances of a psychological approach to economics taking off within the economic
curriculum would be much enhanced if it were embedded in a textbook that came with
an instructors’ manual, PowerPoint slides, a test-bank of questions, a student study
guide/help manual and a website. Without such a package, the academic who is
sympathetic to psychological economics faces a major tooling up problem and
potential resistance (and poor teaching evaluations) from students who are used to
the comfortable feeling of having a textbook to fall back on. The existence of such a text
signifies some kind of legitimacy in the eyes of economists at large for what the teacher
is covering.
To date, no one has produced an economic principles text which seeks to cover
familiar terrain but does so by bringing psychology in wherever its relevance has led to
a research literature, in the manner of a typical consumer research text in marketing.
(This is not to deny the existence of economic psychology texts produced in Europe
during the 1950s, though, sadly, not in English (see van Raaij, 1999), or of more
recent texts produced by psychologists, such as Lea et al. (1987), Lewis et al. (1995),
Furnham and Argyle (1998) and Webley et al. (2001).) Prior to Earl and Wakeley’s
(2005) attempt to go further in this direction, the closest were a few microeconomics
texts that included chapters with psychological content where its significance could be
readily seen, such as in discussions of risk and uncertainty, or consumer demand (Earl,
1995; Frank, 2002). There also is clearly considerable potential for a textbook on
public sector economics that shows what can be achieved by starting with psycholog-
ical foundations and behavioural research. Here, monographs by Kemp (2002) and
Munro (forthcoming) should make the task much easier.
Research assessment exercises obviously discourage academic economists from
investing several years in producing a McDonaldised principles text on psychological
economics. However, the information technology revolution and the tendencies of
some academics to ‘do it my way’ in terms of intrinsic motivation seem to leave two
major grounds for expecting that those who really want to teach economics from this
standpoint will be able to do so without finding the task gets too much in the way of
research.
First, because of the rise of the Internet, teaching may increasingly become far less
linear in style and much more collective and network-based: an emerging role for
 Economics and psychology in the twenty-first century 921
lecturers may be mentors who can guide students to websites from which they may
download superbly presented material on specialised topics that they can study at their
own pace, and with links to related sites. Thus, for example, if an economist wishes to
consider the implications of evolutionary psychology for economic behaviour (cf.,
Cosmides and Tooby 1994), the class can be asked first to visit Paul Kenyon’s superb,
award-winning evolutionary psychology site (http://salmon.psy.plym.ac.uk/year3/
PSY339EvolutionaryPsychology/EvolutionaryPsychology.htm). An ability to develop
a website or two that contributes to this network process, and to demonstrate its
standing in terms of the number of ‘hits’ or links that it achieves, may both contribute
to the collective process of opening up the teaching of economics to psychology (and

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other disciplines) and at the same time provide kudos for teaching evaluations.
Grounds for optimism along these lines are, however, tempered by tendencies of
universities to retreat from the Open Source philosophy in the face of growing
competitive pressures, to claim copyright for teaching materials on their websites, and
to make these resources password-protected.
Second, the emergence of ‘print on demand’ technology makes it possible for
lecturers to assemble ‘readers’ of selected chapters (for example, from some of the
texts referred to earlier), journal and newspaper articles and website materials as
custom-made textbooks for their students, at a fraction of the price of a traditional text.

5.2 Finding space in the curriculum

Though the textbook issue may not actually be as problematic as it appears at first
sight, the internal politics of economics departments may present a major barrier to
using in the classroom those resources that can be assembled for teaching economics
from a psychological perspective. Economists who strive to preserve the mainstream
hardcore can use their weight of numbers at faculty meetings, with reference to the
growing need for economics majors to be versed in the mathematics that they will need
in order to read the mainstream journals, and to have adequate coverage of modern
work from a game-theoretic standpoint. A pluralistic, interdisciplinary perspective can
thus be readily cast as something that dilutes the quality of economics training that can
be provided—even though what is really happening as students progress from one level
to another in a traditional programme is that much the same economics is being
presented in different technical guises.
If this is how the politics of mainstream economics departments works, the chances
for getting much psychology into core economics teaching seem slim and depend
on scope for subterfuge with the aid of texts that assign heterodox material to
‘supplementary’ chapters (as in the original 1991 edition of Frank’s 2002 text).
Perhaps the biggest scope for something other than a piecemeal incorporation of
a psychological approach to economics comes where economists recognise that their
survival depends, owing to a lack of students signing up for economics majors, on
delivering training in economics that will appeal to students and lecturers in other
business disciplines. The foundations of finance theory are perhaps the most likely to
be recast in this manner, aided by publications such as the text by Wärneryd (2001)
and the three-volume collection of articles on behavioural finance edited by Shefrin
(2002). Psychology clearly also has a place in teaching the economics of entrepreneur-
ship (Harper, 2003), evolutionary/growth of knowledge-based approaches to the
firm (to which Loasby, 1983; Earl, 1984 were early contributions) and consumer
922 P. E. Earl
behaviour/lifestyles in relation to fashions/new product adoption, non-price compe-
tition and barriers to brand switching (cf., Earl, 1986; Waterson, 2003). It may well be
that mainstream heads of economics departments will deal with problems that their
psychologically inclined staff might otherwise pose by confining the latter to duties at
the interface of economics with other business school disciplines. Such departmental
heads might turn a blind eye to how far the teaching departed from the orthodox core
so long as it generated enough students to allow other members of their departments
to continue teaching in the traditional manner.
It would be easier to include psychological elements in economics courses if
economics lecturers could presume some knowledge of psychology among their

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students. The same could be said regarding other fields that could be part of a truly
interdisciplinary approach to economics. In the 1970s, some universities experi-
mented with compulsory multidisciplinary foundation courses (see, for example,
Open University, 1970, which brought together classic contributions in economics,
sociology, psychology, politics geography and demography). Nowadays, however,
student ‘customers’ often have more freedom of choice early in their degrees, so it is
hard to know what knowledge of other disciplines can be taken for granted.

5.3 Students and pluralism

If, as seems likely, mainstream economists do not abandon their present hardcore
modes of analysis and adopt ones based on ideas about human behaviour that are
empirically grounded in psychological research, then the most that psychological
economists may hope for when teaching core principles courses is the chance to offer
a pluralistic presentation of the rival perspectives. Even though many students
presently see economics as a ‘mass of diagrams’, it would be unwise to presume they
would welcome the prospect of having to grapple with contending perspectives that
require them to meet new analytical challenges and accept a less dualistic mode of
thinking (Earl, 2000). The standard diagrams and equations may be puzzling, but at
least they enable students to work through problems to deterministic solutions and be
confident about the quality of their assignment answers before submitting them. When
one is trying to interest students in the challenges presented by pluralistic teaching (as
when selling a psychological approach to colleagues), it may be wise to keep in mind
the lessons that psychology offers regarding the impact of anxiety on behaviour, and
how this can be reduced.

6. Conclusion
It is difficult to reach a definite conclusion about the future role of psychology in
economic analysis. Things look promising in sub-disciplines such as entrepreneurship
and technological change, environmental and public sector economics and economics
of the law. Though the potential seems considerable, a reflexive analysis points towards
major scope for resistance to change within core theory areas. It is ironic that
mainstream economists, whose hard core includes the axiom of gross substitution, are
supported by an institutional environment in which intolerant decision rules penalise
academics who go against the stream. Economists have been accustomed to seeing
their discipline as an elite one, the physics of the social sciences, that is not based
on another, ‘softer’ science and they are likely to find it difficult to shake off their
 Economics and psychology in the twenty-first century 923
self-images as ‘hard scientists’. Perhaps the future lies with ‘cognitive economics’,
which includes psychological elements but does not sound like (and is not) a way of
doing economics that has been taken over by one particular discipline.

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