Behavioral Economics

The articles in question attempt to answer a number of questions. The two non-economists Nobel Prize winners attempt to answer the ‘what’ question as in: what influences the human decision making? Simon (1978) argued that it is not only rational thought that leads to human decision making while Kahneman and Tversky (1979) argued that “the ways in which alternatives are framed”. Do individuals maximize subjective expected utility? On page 6, Laibson explains that “Binding himself to the mast prevents his future self from countermanding the decision made by his present self”. This means that keeping oneself under tight lock and bolt and checking oneself enables maximization of utilities and economically balances the expenditure in both time and money cases. The major question that these articles attempt answering is whether economists’ assumptions of utility or profit maximization are good approximations of real people’s behavior? In the issue of good approximations, the use of different terminology and rephrasing original statements make them appear different to people. This is displayed on the framing alternatives differently by Tversky and Kahneman “people are more willing, apparently, to take risks to prevent lives being “lost” than to “save” lives. (p. 2). The interchange of the wording in the case study changed the results yet the outcome was the same.

 

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The systems thinking used and practiced by marketers in applying behavioral economics to get customers to buy is a an argument put by the article that the subject existed before the name came up. The concept of randomizing elements is widely used by telemarketers and economists in order to attain high profit. The acknowledgement of “psychology as a part of decision-making” by Smith (p. 1), was the beginning of a long journey of getting behavioral economics adapted by neo classical economists.

Non-economists took the initiative to study the psychological side of economics-this was the first step. The study of people’s anomalies by Richard Thaler in the 1980’s introduced psychological insights into economics. Historically (the 1980’s) the concept was loathed and greatly disliked by economists, as time went on it started gaining favor from the public, thus becoming a popular force to be reckoned with. In modern world, behavioral economics is being applied to practically improve lives and production in developing countries. Nava Ashraf says that she “noticed that farmers and small-business owners were often not doing the things they should do” (p. 8). She went on to help citizens save their money by applying the basics of behavioral economics in the situation.

The economic events of the millennium have strengthened the argument made by behavioral economists like Herbert Simon. In the wake of the happenings, (the 9/11 attacks), Edward Glaeser “began using behavioral economic approaches to research”. This indicates that in the event of such happenings, neoclassical economists cannot calculate the reasons behind the deed but behavioral economists can look at the brains behind the idea and solve the case. Amid the throngs of rapid globalization, global recession, economic re-balancing and knowledge explosion, the events strengthen the initial argument put across by the behavioral economists back in the 1940’s. These anomalies and boomerangs need man to analyze the driving force behind the economic leaders and factors that contribute to the situation as it stands.