Overview of Behavioral Economics Essay

Understanding behavioral economics will also help in making critical decisions like how much a person need to be saving, how much effort we need to put in our works and where we will choose to live in future.

Framing as defined by Robert Entman is “to frame a communicating text or message is to promote certain facets of a ‘perceived reality’ and make them more salient in such a way that endorses a specific problem definition, casual interpretation, moral evaluation, and/or a treatment recommendation (Cissel 68).” Framing is an extension of agenda-setting, which is when the media tells us what to think about (Sparks 228).

The framing effect explains how a problem's phrasing can effect an individual's decision making. When the problem asks if you would be willing to make a gamble where you have a 90% chance to lose 5 dollars and a 10% chance to win 95 dollars, most people say they would not take the gamble (which means they are risk adverse) because the problem states that you have a chance to lose 5 dollars, and this creates a psychological response in the participant because they naturally want to avoid losses.

In today’s economy, decision-making skills vary for each household; however, the bottom-line goal for every individual is to get the most for their money. In order to do this, there are 4 principles of individual decision-making: facing trade-offs, evaluating what one is giving up to obtain their goal, thinking at the margin, and responding to incentives.

We all want to stretch our wallets. If we can get something at a cheaper price but receive the same benefits, we do it. If we want flood insurance, we try to get cheap flood insurance. As long as we get the same benefits from the general flood insurance cost, we go for less.

Decision framing is the first step in the decision making process, and it builds the plan for making a good choice. The decision frame does not always ensure the right outcome. However, without it, there is no structure when making a decision. Framing is all about how information is presented and if it has an affect on the outcome. Framing is all about how we interpret the information. People interpret things

Economics is the study of human behavior, not unlike other academia subjects that claim this same broad definition. Behavioral economics relies on the subfields of economics that integrate within the insight of psychology (Mankiw, 2015).

There are four different types of framing effects. Equivalency frames happens when different but logically equivalent words or phrases are used to describe an issue, but those different words/phrases evoke a different response. For example, if someone says they are afraid of bunnies, it has a different effect than if someone says they are afraid of rabbits. Emphasis frames highlight different subsets of potential irrelevant considerations of an issue, out of a larger potential set of consideration for the same issue. This mostly occurs when the media is limited on time, and they have to choose what points to speak of an issue to speak about in their short amount of time. An episodic frame takes the form of a case study. It is an event oriented

It is amazing how the addition or omission of a few words can make a huge impact on ones decision. Framing effect, an example of cognitive bias, occurs when people choose an option due to the manner they were asked a question. In other words, framed questions are created with the intention of its participants to perceive the question in a certain way. You are imposing the question through a different filter hoping for a different result. The existence of framing effects has been documented in medical and clinical decisions (decisions made by both the provider and the recipient of health care), perceptual judgments, consumer choices, responses to social dilemmas, bargaining behaviors, auditing evaluations, and many other decisions (Levin I.P et al, 1998).

The attendance quiz question regarding losing and saving lives exhibits the framing theory. This case scenario defines the framing theory because of the obvious variance in the language used to describe the same outcome. The framing theory is that by emphasizing a situation or title using a certain context of wording will activate a certain shelf to influence someone's decision or thought process.

The Behavioural approach (also called the learning theory) focuses on the belief that our environment, e.g. people, experiences and learning, influences the development and behaviour of an individual whilst thinking the internal functions, such as thoughts and cognition, are impossible to observe, so they are not apart of the scientific approach to psychology. This theory is also based on the concept of ‘explaining behaviour through observation. Behaviourists assume individuals are born as a blank state (tabula rasa), meaning they do not think biology and cognitive functions influence our behaviour, only our environment does. A large idea that the theory hold is that behaviour can be broken down into stimulus-response units. Stimuli are anything environmental that triggers an individuals’ senses, for example, a student being asked to complete an assignment (stimulus) would respond by completing the assignment. Stimulus-response theories form the basis of classical or operant conditioning, which suggests animals and humans can learn through the relation of a response to any certain stimuli.

The Behavioral Learning Theory believes that behavior is learned from either the environment, the people in the individual's life, the media, or society as a whole. This theory contradicts the Biological theory, which states that criminals are "born to be bad" and that criminal behavior is inherited. The behavioral theory looks at the environment as well as society's impact on how an individual acts which might be the reason for criminal behavior. This theory blames the environment as well as the individual by saying it is a learned behavior and that it also was a choice they made. A basic assumption is that behavior is learned and modeled by individuals, groups, the media, and society as a whole.

There are number misunderstandings surrounding behavioral economics, which leads to several questions. According to the general definition behavioral economics is the mixture of psychology and economics that studies the effect of emotional, psychological and social factors upon economic decisions made by people and institutions. On the one hand, traditional economic theory makes assumption of rationality in the economic models which implies that people are rational, patient and proficient economic agents who know what makes them happy and try to maximize their utility and so always make rational decisions. While behavioral economists claim that this assumption is violated in reality and try to make these economic models more realistic by considering the fact that in reality humans are not always rational, do not follow logic when they make decision or even avoid making choice when they face

Behavioural economics helps to explain that assumptions which have been taken are not always borne out. It’s related to physiology, economics and other related disciplines to demonstrate that what actually people thing and what are their expectations in the future if changes happen. The findings of behavioural economics have organized in a variety of ways. When in the time of decision making as content between two system people are likely to rely on first system which leads to a predictable deviations from the expectations of standard economic theory.

The specific area of interest I focused on for this assignment is Behavioural Economics. Behavioural Economics (BE) is a scientific discipline that involves the study of a variety of effects on the economic decisions made both by institutions and individuals (Lunn, 2014). This is a dynamic and exciting field and sub-discipline within the field of economics that has gained much popularity in recent years. Behavioural economists have the opportunity to make important contributions in a variety of fields, including marketing and advertising, policy making, and in many other industries. In this essay, I discuss the field of Behavioural Economics and explore current trends and important knowledge helpful for anyone interested in a future career in this area. It is argued that Behavioural Economics is far more than a passing trend and will only grow in importance, particularly in public policy making; at the same time, researchers in the field need to start addressing some of the theoretical and conceptual problems in the field if BE is to truly realize its potential.