THE ROAD NOT TAKEN: HOW PSYCHOLOGY WAS REMOVED FROM ECONOMICS, AND HOW IT MIGHT BE BROUGHT BACK* Luigino Bruni and Robert Sugden This article explores parallels between the debate prompted by Pareto’s reformulation of choice theory at the beginning of the twentieth century and current controversies about the status of behavioural economics. Before Pareto’s reformulation, neoclassical economics was based on theor- etical and experimental psychology, as behavioural economics now is. Current Ôdiscovered prefer- enceÕ defences of rational-choice theory echo arguments made by Pareto. Both treat economics as a separate science of rational choice, independent of psychology. Both confront two fundamental problems: to find a defensible definition of the domain of economics, and to justify the assumption that preferences are consistent and stable. One of the most significant developments in economics over the last two decades has been the growth of behavioural economics, which draws on the theoretical and methodological approaches of psychology in explaining economic phenomena. Behavioural economists take pride in grounding their explanations on empirical hypotheses about how human beings really think and act, rather than on deductions from a priori assumptions about rational choice, and in subjecting those hypotheses to experimental test. Viewed in historical perspective, behavioural economists are trying to reverse a fundamental shift in economics which took place from the beginning of the twentieth century: the ÔParetian turnÕ. This shift, initiated by Vilfredo Pareto and completed in the 1930s and 1940s by John Hicks, Roy Allen and Paul Samuelson, eliminated psychological concepts from economics by basing economic theory on principles of rational choice. From then to the 1980s, almost all the main lines of development in economic theory were aimed at extending the power and scope of rationality-based models. For example, a major concern from the early 1950s was to extend the theory of rational choice to deal with risk and uncertainty. The ÔmicrofoundationsÕ and Ôrational expectationsÕ literatures sought to replace the psychologically and empirically-based assumptions of Keynesian macroeconomics with assumptions about the preferences and beliefs of rational agents. The new sub-disciplines of public choice, law and economics, and institutional eco- nomics extended rational-choice modelling to areas of social life that had previously been thought of as non-economic. The work of John Harsanyi and John Rawls initiated a literature in which social philosophy was grounded in rational individual choice. Game theory, interpreted as modelling the strategic interactions of ideally rational agents, was seen as the logical completion of rational-choice theory; there was a widespread hope that, by providing a universal theory of choice, game theory would * An earlier version of this article was presented to a seminar at the Centre for the Philosophy of the Natural and Social Sciences at the London School of Economics. We thank the participants in that seminar, and Nicolo ` Bellanca, Ken Binmore, Robin Cubitt, Ivan Moscati, Chris Starmer and three anonymous referees for comments and advice. Robert Sugden’s work was supported by the Leverhulme Trust. The Economic Journal, 117 (January), 146–173. Ó The Author(s). Journal compilation Ó Royal Economic Society 2007. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. [ 146 ]