Behavioural economics and the
dialogue with psychology
All economic behaviour involves decision-making by individuals, and
traditional (neo-classical) theories of economic behaviour assume that
economic agents apply rational thought to each and every decision to
achieve the maximisation of personal benefit (utility) or, in the case of
producers, the maximisation of profits
Irrational behavior – in economics irrational behavior is when people make
choices and decisions that go against the assumption of rational utility
maximizing behavior
The assumption that man is rational is central to micro economic theories,
and can be seen evidently in marginal analysis. – it’s the assumption that
man carefully weigh-up the expected costs and benefits of alternative
decisions based on accurate information, and select the option that
maximizes their personal gain.
This assumption was made because it was much easier to reduce the chaos
of reality. However, that’s not the case is it? – in the world humans are not as
rational as we think we are, and are influenced by numerous variables and
emotions blurring our logical thought processes
Rather than rely on a theory that explains the behaviour of consumers,
behavioural economics relies on experiments and the accumulation of
evidence about how consumers behave under a broad variety of different
circumstances
There have been 3 major contributors to the field of economics
1.Daniel Kahneman – Prospect theory:
It talks about how people behave under risk and uncertainty. He says that
people think about immediate gains and losses rather than wealth. He also
says people value gains and loss differently; “people hate losing more than
they love gaining”
https://www.ubs.com/microsites/nobel-perspectives/en/laureates/daniel-kahneman.html
2. Robert.J Shriller
He showed that variations in the prices of stocks and
bonds over long periods occur in predictable patterns
that reflect the irrational expectations of investors
regarding the value of future returns. Shriller attributed
this larger than expected fluctuation to psychological
factors, aguing that investors are irrational or not
perfectly rational, because of this he concluded that the
stalk market is insufficient .
3.Richard Thaler
Mental accounting refers to the different values a person places on the
same amount of money, based on subjective criteria, often with detrimental
results.
Mental accounting often leads people to make irrational investment
decisions and behave in financially counterproductive or detrimental
ways, such as funding a low-interest savings account while carrying large
credit card balances.
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