Feature

In high school, renowned economic theorist Matthew Rabin, PhD, was voted "Most Likely to Express His Opinion."

Nineteen years later, the honors for speaking up keep rolling in for Rabin, who is recognized as a key player in helping his field develop economic models using basic psychological principles. Since 1995, he has garnered fellowships or grants from the National Science Foundation, Alfred P. Sloan Foundation and Russell Sage Foundation. Last year, he received one of 25 prestigious MacArthur Foundation "genius" fellowships.

Most recently, the American Economic Association (AEA) awarded Rabin its prestigious John Bates Clark Medal, given biannually to an American economist under age 40 who is making significant contributions to economic thought and knowledge. What makes Rabin's work so unique is that he has made melding economic theory with the tenets of psychology an accepted approach in his field; 15 years ago graduate students never could have used behavioral economics the way they can today.

However, this University of California at Berkeley professor is quick to note that he wasn't the first to take this interdisciplinary approach. Since the 1970s, he says, several notable economists have pointed out that humans do not always make decisions rationally and in their own best interest, as traditional economic models propose.

But drawing from that pioneering work, Rabin and his contemporaries are integrating the ideas of behavioral economics into the mainstream, he says. Among them is debunking the economic principle of "time-consistent preference," which posits that regardless of the time of a decision, the choice a consumer makes will be the same. Rabin and his colleagues use basic psychological ideas to show that's not always true. Given the choice between $10 today or $15 tomorrow, many people would take the $10 now. But given the choice between $10 200 days from now and $15 201 days from now, most would choose the $15. Traditional economic models don't take into account that our preferences can differ depending on the time span involved, Rabin says.

"We tend to want ourselves--beginning tomorrow--to behave in a way that's forward-thinking, but in terms of making decisions today, we tend to decide based on immediate gratification," Rabin explains.

His mathematical work has shed new light on economic models by taking into account that behaviors--including procrastination, addiction and playing fair--can affect the choices people make and produce different economic outcomes in a range of human activities from dieting, gambling and credit-card use to financial planning and stock investments.

While a whiz at economics, Rabin says he has a special penchant for psychology--even though he's never taken a formal course.

"I confess that I find psychology much more interesting than economics," he laughs.

Further Reading

Matthew Rabin's Web page can be found at http://emlab.berkeley.edu/users/rabin. For an overview of behavioral economics, Rabin suggests reading "The Winner's Curse," by Richard H. Thaler (Princeton University Press).