What is behavioral economics

Consumers tend to buy customized products that meet their needs and requirements. However, most consumers are satisfied with a popular brand or one they already owned in the past. In an ideal world, consumers make choices after evaluating the cost and benefits of a product, existing preferences and market trends. Behavioral economics, therefore, studies the psychological, social, emotional and cognitive effects of any economic decision-making process of an individual or institution and the consequences of such decisions on resource allocation, market price and revenue. Different types of economic behavior have different impacts on the different environment. Therefore, the impact is never uniform. The study of

History of behavioral economics

During the “classical period” of the economy, the study of microeconomics was often associated with that of psychology due to the fact that the behavior of a given individual when it came to making transactions often depends on their perception of fairness and justice. However, the discipline was reshaped as a natural science during the neoclassical economic period by developing the concept of economic human beings ( Homo economicus), which deduced economic behaviors based on their hypotheses. In 20 thThe century, the expected utility and the obvious utility have become popular thanks to the efforts of Gabriel Tarde and Laszlo Garai. Cognitive psychology began to explore the brain as an information processing device in 1960s that contrasted with the behavioral model. In 1979, prospect theory was developed to explain all that the two utility theories could explain. However, economists agree that the theory of perspective could only explain a series of phenomena that could not be explained by utility theories. The prospect theory has been revised to the theory of cumulative perspective which has focused on the evaluation phase allowing nonlinear probability.

Application of behavioral economics

Behavioral economics has been used to explain the concept of intertemporal choice, which is a situation in which the effects of the decision made are felt at a different time. Consumers make decisions with the expectation that a positive result will be achieved at a different time from the moment the decision is made. Conditioned conditional utility is an application of behavioral economics and explains why individuals have illusions of control and determine the likelihood that external factors with their usefulness are a function of the choices and actions they perform even when they cannot change or influence external factors. Behavioral economics also explains the difference between positional consumption that is consumption in relation to other people and non-positional consumption that is absolute. For example, living in a good home is positional while retirement savings are not positional. Robert H Frank in his book “The Darwin Economy” suggests that fiscal policies must reflect these consumption patterns.


Behavioral economics has limited applications in many market situations, as competition and the limited nature of opportunities require a closer approximation of rational behavior. The market situation therefore applies rationality as opposed to behavior in decision-making. Prospect theory is a decision model and not general economic behavior and is applicable only in a one-off situation presented to a market participant. Traditional economists prefer the revealed preference over the stated preference in determining any economic value. Nor is there a coherent behavioral theory or unified theory to support the basis for behavioral economics.

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