May 25, 2024

The economy has a weakness. Until recently, many economists ignored or criticized this weakness. However, this weakness can be seen as responsible for the mistakes economists have made for centuries. This is an erroneous assumption that people are rational.

 

However, if we were really sensible, we wouldn’t be falling for promotions like buy one get one free that we come across so often. So much so that instead of comparing our salaries with others, we would be evaluating our salaries purely on their absolute level.

Of course, despite all these examples of irrationality, standard neoclassical economics is based on the assumption that people act with boundless irrationality, will and selfishness. This assumption is the core of the invisible hand theory of the famous economist Adam Smith .

According to Smith’s invisible hand theory, selfish rational behavior creates a more prosperous society. This typical rational man that economists want to see is called the economic man .

However, of course, in reality, people prefer to take action with their emotions. Examples of these feelings are love, jealousy, pain and excitement. This is what causes people to act emotionally. In this publication, we will focus on some topics such as behavioral economics and what is behavioral economics and what are its basic principles.

 

What is Behavioral Economics?

Behavioral economics is the field that studies the conditions under which people behave irrationally and why. Behavioral economics is also commonly known and can be defined as behavioral economics.

 

The field of behavioral economics is an exciting new branch among many academic studies than it has ever been. So much so that this field examines both psychology and economics under one roof.

Behavioral economics, also commonly known as behavioral economics, is not only an interesting field of study but is also beginning to play a very important role in economic policy.

Behavioral economists, who try to understand how the brain and mind work and think, also have undeniable knowledge about the causes of people’s behavior.

The 5 Most Fundamental Principles of Behavioral Economics

In order to fully understand the concept of behavioral economics, it is absolutely essential to know some of the basic principles expressed by this field. In this sense, it is absolutely necessary to know the five most basic principles of behavioral economics in order to better understand the subject.

So let’s take a look at the five most basic principles of behavioral economics:

1 – People tend to act with moral and value judgments. Most of the time, they take action not in a way that makes more profit, but rather in ways they believe to be right.

2 – People make quite different judgments whether money is involved or not. They distinguish between social and market contexts. However, according to neoclassical economists, for example, there is no difference between giving a 10 lira book to a friend for a gift and giving 10 lira.

3 – Also, people are the sum of their own idioms, experiences and the experiences of other people. Most of the time, they consider other people’s decisions compared to their own personal judgments and make their decisions accordingly.

4 – People tend to act according to their habits and previous experience, rather than questioning themselves to find the most appropriate behavior. Usually, they can’t get past this very easily.

5 – People behave irrationally in financial investment. For example, when they consider recent events, they attach more importance to these events than to the long-term. This causes them to not calculate the probabilities correctly.

Similarly, when faced with loss of earnings, they may not respond properly. On the other hand, it is not easy for them to give up on investments because they act with strong feelings of ownership.

What are the Views of Behavioral Economics Pioneers?

The views of psychologists Amos Tversky and Daniel Kahneman, who are among the pioneers of behavioral economics, are very important in this sense.

Both Tversky and Kahneman developed theories about how the brain processes information in 1970 and compared this with economic models.

In their study of these pairwise comparisons, they found that people behaved neither rationally nor randomly when faced with uncertainty, but still behaved in predictable ways. Most of the time people use some shortcuts. Tversky and Kahneman describe these shortcuts as heuristics.

According to these psychologists, they are shaped by experience or the environment. According to Tversky and Kahneman, for example, someone who burns his hand in a fire will be even more careful when approaching a fire in the future.

Overview of Behavioral Economics Examples

A new example was recently put forward by behavioral economist Dan Ariely from MIT. Ariely asked her students to write down their social security number on a piece of paper, followed by the maximum amount they would pay for a bottle of wine.

At Ariely’s request, the amount students will pay depends on their social security number, as low numbers say they will pay less and high numbers pay more. This phenomenon is also called anchoring and, like the framing phenomenon, it overturns the view that price in the market is a function of supply and demand .

The latest developments in behavioral economics utilize modern MRI technology to scan individuals’ brains and identify observed changes with economic decisions.

In addition, an interesting finding from the field of neuroeconomics is that when a salesman receives a humiliating offer, the part of the brain that responds is the same part of the brain that responds when people see a bad picture or a nasty smell.

Behavioral Economics and Nudge Economics

Considering all these issues, in this case, people do not always make decisions based on their own interests. Realizing this has serious consequences for the economy. Many economic models are based on this basic assumption.

For example, economists often assume that people will make money for retirement throughout their lives because it is in their own interest. It is also assumed that people will not be able to borrow too much because they will not run out of gold, but according to the field of behavioral economics, we usually borrow with intuitive decisions rather than considering our own self-interest.

For this reason, instead of waiting for people to make the right choices voluntarily, it is necessary to nudge them to make some decisions such as improving their financial situation or saving.

This gives rise to what some call the poke economy . Such emerging policies aim to put the behavioral economics field into practice. For example, some hold the idea that people should be gently nudged in a positive, specific direction, without being stripped of their right to choose.

Again, one of the best examples of this is the automatic entitlement of working people to be included in retirement plans and to exit the plan if they do not request it. As it is known, this practice is carried out in our country with the private pension system.

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