Behavioral Economics

Explain in brief Behavioral Economics Concept and Main Principles. Describe in brief the main Behavioural economic theories and make comparative analysis The rational choice theory. Three assumptions are important. The rational expectation theory. Robert Lucas Amita Etzioni's mixed scanning theory method. The goal of the theory. Elements / characteristics. Critics advantages disadvantages , who criticize. Authors / scientists. The incremental decision making theory Lindblom Ch. Keywords main. Discounted Benefit Theory. Keywords main. Kahneman Decision Making Theory Keywords.

Behavioural economics is the study of psychology as it relates to the economic decision-making processes of individuals and institutions. The two most important questions in this field are:

Are economists' assumptions of utility or profit maximization good approximations of real people's behaviour?

Behavioural economics is often related to normative economics. The field of behavioral economics blends ideas from psychology and economics, and it can provide valuable insight that individuals are not behaving in their own best interests. Behavioral economics provides a framework to understand when and how people make errors. Systematic errors or biases recur predictably in particular circumstances. Lessons from behavioral economics can be used to create environments that nudge people toward wiser decisions and healthier lives. Behavioral economics emerged against the backdrop of the traditional economic approach known as rational choice model. The rational person is assumed to correctly weigh costs and benefits and calculate the best choices for himself. The rational person is expected to know his preferences (both present and future), and never flip-flop between two contradictory desires. He has perfect self-control and can restrain impulses that may prevent him from achieving his long-term goals. Traditional economics uses these assumptions to predict real human behavior. The standard policy advice that stems from this way of thinking is to give people as many choices as possible, and let them choose the one they like best (with minimum government intervention). Because they know their preferences better than government officials do. Individuals are in the best position to know what is best for them. In contrast, behavioral economics shows that actual human beings do not act that way. People have limited cognitive abilities and a great deal of trouble exercising self-control. People often make choices that bear a mixed relationship to their own preference (happiness). They tend to choose the option that has the greatest immediate appeal at the cost of long-term happiness, such as taking drugs or overeating. They are profoundly influenced by context, and often have little idea of what they will prefer next year or even tomorrow. As Daniel Kahneman (2011, p5) put this, “It seems that traditional economics and behavioral economics are describing two different species.” The latter shows that we are exceptionally inconsistent and fallible human beings. We choose a goal and then frequently act against it because self-control prevents us from implementing our goals.

1. The Overconfidence Effect – This phenomenon is distinct from bragging: We don’t exaggerate our abilities intentionally to impress. Rather, we earnestly fail to understand our own aptitude, erring on the side of self-regard. This ego-protective cognitive mechanism is called the “Overconfidence Effect.”