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    Are Economis-WPS Office

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    Are Economic

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    Are Economis-WPS Office

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    Are Economic

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    1. Are Economis-WPS Office

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    Are Economic

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    3 views3 pages

    Are Economis-WPS Office

    Uploaded by

    leoton770
    Are Economic

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    © All Rights Reserved
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    1.

    Are economists' assumptions of utility or profit maximization good approximations of real

    people's behavior?

    2. Do individuals maximize subjective expected utility?

    Behavioral economics is often related with normative economics.

    BREAKING DOWN Behavioral Economics

    In an ideal world, people would always make optimal decisions that provide them with the

    greatest benefit and satisfaction. In economics, rational choice theory states that when humans

    are presented with various options under the conditions of scarcity, they would choose the

    option that maximizes their individual satisfaction. This theory assumes that people, given their

    preferences and constraints, are capable of making rational decisions by effectively weighing

    the costs and benefits of each option available to them. The final decision made will be the best

    choice for the individual. The rational person has self-control and is unmoved by emotions and

    external factors and, hence, knows what is best for himself. Alas behavioral economics explains
    that humans are not rational and are incapable of making good decisions.

    Behavioral economics draws on psychology and economics to explore why people sometimes

    make irrational decisions, and why and how their behavior does not follow the predictions of

    economic models. Decisions such as how much to pay for a cup of coffee, whether to go to

    graduate school, whether to pursue a healthy lifestyle, how much to contribute towards

    retirement, etc. are the sorts of decisions that most people make at some point in their lives.

    Behavioral economics seeks to explain why an individual decided to go for choice A, instead of

    choice B.

    Because humans are emotional and easily distracted beings, they make decisions that are not
    in

    their self-interest. For example, according to the rational choice theory, if Charles wants to lose

    weight and is equipped with information about the number of calories available in each edible

    product, he will opt only for the food products with minimal calories. Behavioral economics
    states that even if Charles wants to lose weight and sets his mind on eating healthy food going

    forward, his end behavior will be subject to cognitive bias, emotions, and social influences. If a

    commercial on TV advertises a brand of ice cream at an attractive price and quotes that all

    human beings need 2,000 calories a day to function effectively after all, the mouth-watering ice

    cream image, price, and seemingly valid statistics may lead Charles to fall into the sweet

    temptation and fall out of the weight loss bandwagon, showing his lack of self-control.

    Applications

    One application of behavioral economics is heuristics, which is the use of rules of thumb or

    mental shortcuts to make a quick decision. However, when the decision made leads to error,

    heuristics can lead to cognitive bias. Behavioral game theory, an emergent class of game

    theory, can also be applied to behavioral economics as game theory runs experiments and

    analyzes people’s decisions to make irrational choices. Another field in which behavioral

    economics can be applied to is behavioral finance, which seeks to explain why in

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