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Behavioral economics (and the related fields behavioral finance and neuro-economics) is a field that integrates economics with psychology. Behavioral economics constrasts with neoclassical economics especially in two subjects: that people are always rational and are always well-informed. It concentrates more on micro decisions and makes heavy use of the experimental method. Two Nobel Prizes in economics were given to people working in this field: Daniel Kahneman, in 2002 (who shared his prize with the diehard libertarian Vernom Smith) and Richard Thaler, in 2017. Other notable behavioral economists include Amos Tversky, Herb Simon, Dan Ariely, and George Loewenstein.
"Rational" in an economics context refers to behaviour that is ultimately to the benefit of the individual rather than evidence-based scientific reasoning.
Some differences from classical economics
There are a number of ways in which behavioural economics looks beyond the assumptions of classical economics. Some of these are listed below. However, most of these issues are not entirely overlooked in classical economics, but behavioural economics might place more emphasis on these factors or add an extra dimension to their consideration.
- Bounded rationality may lead to instances where choices are inconsistent with standard economic assumptions as people take shortcuts in decision making to reach a good-enough choice rather than the optimal utility-maximizing choice.
- Altruistic and co-operative behaviour are considered as alternatives to competition
- Discusses the factors determining happiness and the relationship between utility and well-being
- Discusses the relationship between social capital and economic efficiency
- Analyses ethical concepts and their relationship to economic actions, particularly concerning motivation to co-operate rather than compete
- Looks at justice and income distribution from an ethical point of view
- Explores the actions of individuals and groups with regard to co-operation and trust
- Looks at crime from an ethical and social point of view, as well as economic
- Considers effects of social capital on the economic system
- Looks at ways that ethical behaviour can be encouraged in economics.
Criticisms of right-wing libertarianism
Many of the principles of behavioral economics go directly against right-wing libertarianism as analysis of the inherent irrationalities in a market disproves the notion that capitalism left to its own devices can do no wrong.
The best example is the dynamics of racism and sexism. Unlike the Austrian school (and to a lesser extent the Chicago school), which stipulate that racial discrimination and the gender pay gap do not exist, BE actively points to unconscious biases that harm companies in their hiring process.
- Simon H.A. (1990) Bounded Rationality. In: Eatwell J., Milgate M., Newman P. (eds) Utility and Probability. The New Palgrave. Palgrave Macmillan, London.
- see, for example, Levenson, A (2013). "Happiness, Behavioral Economics, and Public Policy"
- John Malcolm Dowling, Chin-Fang Yap. Modern developments in behavioral economics: social science perspectives on choice and decision making. 2007, 3.