Abstract

This chapter discusses the role of methodological individualism in behavioral economics. Since behavioral economics developed in reaction to traditional microeconomics, the chapter sketches first the latter’s understanding of methodological individualism. It argues that traditional microeconomics is based on three principles: the self-interest principle, the rationality principle, and the social change principle. The chapter then discusses experimental findings that led behavioral economists to relax all three principles. It argues that, in particular, the relaxation of the social change principle pushes the boundaries of methodological individualism as understood in traditional microeconomics since it highlights ways in which social institutions, norms, and rules affect individual processes of preference formation. In doing so, behavioral economics invites intricate methodological discussions of the bidirectional relationship between social institutions and individual actions.