Behavioral Economics Essay

598 Words3 Pages
Behavioral economics studies cognitive, emotional and social factors effects on economic decisions made by an individuals and consequences returns, resource allocation and market prices. It assumes that human beings are rational in the decisions they make. Behavioral economics do not involve assumption. The difference comes in from the notion that the human behavior observation contradicts behavior of people to be perfectly rational. Therefore, the two starts from different points. Both behavioural economics and economics try to proscribe and describe patterns of human spending. The implication is that it does not only try to describe human behavior but tries to dictate human behavior.
Behavioral Economics
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From this perspective, psychology influenced an individual’s decision making. Neoclassical economists rejected the psychological perspective and adopted the behavioural perspective. The neoclassical economist stated that the behavior of one dictates ones rationality in the making of decisions which is proscriptive. With classical economists, empirical evidence implies humans are static no matter how much they try to change their behavior.
Presently, the classical and neo classical economist have combined to achieve modern economics. It comprises of both psychological and behavioral activities in making of decisions. A classical economic theory market is not all about demandand supply of sellers and buyers. A seller benefits more by giving a buyer more than he needs or selling at higher prices. According to Pareto efficiency that states that the distribution in the markets creates efficiency and both buyer and seller trades off well. This model does not benefit both parties;therefore, a more realistic model was adopted. Hyper rational economist is one who uses ancient ideas to be a prey and a predator at the same time. This mode tries to balance the welfare of both parties involved in the market. Both classical and neo classical shows the behavior of an individual taking into account the social, cognitive and resource allocation and the consequences on demand and
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