Making Economics Real: A Look Into Behavioral Economics

For a long time, economists had been presenting corporate and government decision-makers with models that promised to be so accurate that they would be swayed by the predicted favorable outcomes. But there was a little hitch. None of the predictions came out to be true. “But why?”, one might ask. That’s because the predictive models were based on conventional economics, a branch of the subject that considers human to be truly rational and just beings. But all this only lasted until Richard Thaller came up with a new field of Economics that would consider humans to be simply “humans”, known as behavioral economics. According to top economics assignment help services, behavioral economics is the study of human psychology and their decision making, to see how they both combine to affect the economics of global or local institutions.

How the Field Came to be?

The credit of making behavioral economics what it is today goes to Daniel Kahneman, Robert J. Shiller, and  Richard Thaler. Thaler today is also known as “Father of Behavioral Economics”. But according to top experts at a case study writing service, works relating human psychology to decision making could be traced back to the time of great Scottish economist Adam Smith, aka, father of modern Economics.  In his book “The Theory of Moral SEntiments”, published in 1759, Adam argued that our decisions and day-to-day practices towards others are fueled by the view of a third party, which he called as “Impartial Spectator”. Fast forward to the 20th century, and we could see Daniel Kahneman, along with Amos Tversky, publishing his Prospect Theory in  1973.

The difference between Traditional and Behavioral Economics 

The big plus of behavioral economics, over the conventional one, is that it takes a more realistic approach when making assumptions about human and their behavior. It talks about heuristic. Heuristics are basically “Rule of Thumbs”, or mental shortcuts, that we as a human count on when making a decision. Traditional economics, on the other hand, thinks of people as rational beings, who know how to act and decider in every possible situation. SO let us try and understand this with an example. The following example is used by many economics assignment experts.

So, say, there is Tom who has an air conditionaer in his home. Now, the local government in Tom’s city is too much concerned about the environmental changes and wishes to do something about it. In a bid to do so, it comes up with a plan that every household should only use their ACs for two hours a day, a practice that would take down the emissions through them at a significant low. “The decision seems scientific and well calculated, and will be followed by the citizens”, conventional economists would argue. But a behavioral economist would agree to the contrary. According to them, Tom would stick to the guidelines only if the world was an ideal place. But, in reality, it isn’t. So the moment he switches on his AC, factors like his comfort, comfort of his family, the comfort of his daily guests, would come into play. And he will soon decide that two hours is too short of a period. Thus throwing out all of the world’s environmental concerns out his window. So while making policies, according to experts at a top case study writing service, factors like psychology, human surroundings, culture, etc. should be considered.

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