Behaviorial Economics

Behavioral Economics
Name Course Instructor Date
Leading figures in Behavioral economics
Behavioral economists analyze people's behavior and markets, including limitations to their behavior and the problems derived from these limitations. Herbert Simon was the first behavioral economist to win a Nobel Prize in 1978 for bounded rationality theory (Manvika, 2020). The theory challenges the conventional understanding of human rationality where rationality is bounded by human thinking capacity, information, and time. Gary Becker (1992) proposed “motives and consumer mistakes” (Manvika, 2020). Daniel Kahneman and Amos Tversky (2002) proposed the “prospect theory and anchoring bias, “and Robert J. Shiller (2013) proposed “analysis of asset prices” Richard H. Thaler won a Nobel Prize for his study on behavioral economics (Manvika, 2020). Thaler’s theory of mental accounting proposes that people classify funds differently and are prone to irrational financial decisions on spending and investments. The irrationality of economic agents when making financial decisions
Divergences from neo-classical theory
Behavioral economists seek to deepen our understanding of how traditionally discarded variables ignored in analysis can be explained in economics and finance. To these economists, people can act in ways that are not always rational and based on different biases. The neo-classical theory studies how individuals and firms make decisions and allocate scarce resources. Economic agents are idealized as rational. Rationality means that people individuals always look for their best interests. Neoclassical theorists describe self-interests under the utility function. People rationalize the pleasures that are accessed through the consumption of any good or service.
Framing and advertising
Framing influences economic decisions and choices since cognitive biases are linked to how options are represented negatively or positively (Dobson & Poels, 2020). In other words, the way information is presented choices. Thus, advertisers and marke...