Econ Research: Cultural Diversity In Behavioral Economics

Cultural Diversity in Behavioral Economics
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Cultural Diversity in Behavioral Economics
Introduction
Behavioral Economics is the study of how psychology determines how institutions and individuals make decisions. The traditional model of economics tends to conceptualize a situation that is defined by calculations and unemotional factors. However, it is evident through study and experience that decisions made by an individual cannot be exclusively explained through calculations. In the ideal world scenario, individuals will always opt for options that provide them with the highest scale of experience and satisfaction. On an economic paradigm, the rational choice theory outlines that individuals tend to choose maximization of satisfaction under conditions that are defined by scarcity (Camerer, 2013). The latter stated approach assumes that individuals, under particular preferences and constraints will weigh between costs and benefits to make rational decisions. The rational choice theory is based on the assumption that an individual's rational choices are not defined by their emotions or external factors, and hence, go for the best decisions (Gino, 2015). On the other hand, behavioral economics opposes the rational choice theory by stating that persons are irrational in decision making, thus their choices may not be the best options.
The interaction between culture and economics is well factored in economic studies. However, studies in behavioral economics tend to ignore the importance of cultural differences. Cultural diversity is defined as differences in language, age, ability, nationality and other social demographics presented within a particular community. Most of the existing studies on cultural diversity are biased of the workplace environment. However, cultural differences are evident in both internal and external situations. This study aims to conduct a comprehensive literature review and discussion on the importance of cultural diversity from a behavioral economics point of view for business organizations.
Literature Review
Behavioral economics is a vast field of study. In recent times, the role of psychological considerations in the decision-making process has attracted several empirical and literature studies. Hence, there exist several kinds of literary works that support importance, relevance, and application of behavioral economics within microeconomics. Additionally, cultural diversity continues to receive extensive attention from researchers and scholars. However, there are limited sources of information that link cultural diversity to behavioral economics within organizational settings. Thus, this section relies upon a limited range of information sources to successfully meet the overall objective of this study.
Introduction to Behavioral Economics
Rational economics continued to manifest in most economic studies since the year 1957 when Howard Raffia, a mathematician started providing statics lessons to business students at Harvard University. With time, Raffia developed his teaching into decision making, characterized with Raffia’s decision-making tree (Camerer, 2013). Ronald Howard, an expert in statistical process coined the term “decision analysis” in the 1950s. Between the 1950s and late 1970s, rational decision-making approaches remained unchallenged by mainstream ideologies. Amos Tversky and Daniel Kanheman started publishing a series of study papers in the 1970s that seemed to challenge the economic notion that had been created in human nature and decision making. The two scholars played an important role towards the development of the prospect theory, a stepping stone toward the growth and development of irrational economic decision-making approaches. In the 1990s, Tversky and Kahneman developed the dual-system theoretical framework to challenge rational norms on individual decision making and judgment (Camerer, 2013). Several other academic developments have been achieved over time and led to the development of behavioral economics as an essential branch of economic studies and application.
Behavioral economics continue to gain relevance in today’s business to explain several economic phenomena. To accomplish this role, there are basic principles assumed within the field of behavioral economics. The first policy is that other people's behaviors greatly influence behaviors of an individual (Shiraev, Shiraev, & Levy, 2016). Through the complex concept of social proof, persons learn how to behave through the influence of the behavioral conduct of the persons that surround them. Contrary to behavioral economics and other psychological outlooks, neoclassical theories differ by arguing that people’s behaviors are independently gained by virtue of one understanding their needs and preferences. Psychological theories tend to differ by citing theories like social learning, social proof, and social identity theories to support the principle of behavioral economics.
Habits are important. Samson (2012) explains that the latter stated principle takes into consideration the importance of factoring in habits when describing how individuals tend to make particular decisions. By developing habits, an individual tends to perform certain practices with little engagement of cognitive ability (Fox, 2015). According to behavioral economics, habits become more important if they deal with issues they are frequently repeated, attract strong rewards and when such rewards are realized as early as possible. Psychology argues that changes from the norm can be achieved if a person seeks to engage the cognitive ability (Gino, 2015). Breaking-off from norms is usually experienced if one tries to partake in complex processes, attempts to make important decisions or develops enough resources (knowledge and time) and gains the higher cognitive ability.
Self-expectations influence People's behaviors. Expectations may be sourced from oneself, or the people in the surrounding. Expectations are built from interests, values, and attitudes that we work within or those that have been set for us. Most often, if a person’s behavior does not support his or her expectation, there is a likelihood of deterrence in behavior. For one to remain consistent with behaviors to meet set expectations, he or she ought to develop commitments. Gino (2015) indicates that economic behaviors of individuals can be altered or changed by influencing the expectations of an individual among other approaches. Economic behaviors include purchasing and saving behaviors. Psychology provides tools and methodologies that can be used to influence behavior.
Another important principle in behavioral economics relevant to this study is that persons are poor at computation. This principle direc...