So you think you are rational?

Behavioural economics is gathering pace particularly in light of The Great Recession. How can we summarise behavioural economics?  If we use the start point that  traditional economic theory assumes people always maximise their utility by making rational decisions, we can say that behavioural economics uses psychology to criticise this assumption.  This field of economics believes that ‘we’ do not react like robots on pure logic alone but have considerable emotional influences on our decision making. We have all experienced the feeling we get when we over eat yet how many times have we subjected ourselves to this feeling?  Have you ever succumbed to an emotive advertisement or an appealing offer only to realise after that maybe you shouldn’t have purchased that product OR after realising this, you still justify the purchase knowing that it was an emotional purchase and not a rational one? Take the classical assumption, of rationality, further and see how markets ultimately clearing to the desired equilibrium is inherently incorrect, according to behavioural economists.  Not from the social cost/benefit perspective but from the consumer behaving in an irrational manner one.  Below are some links for you to peruse and get a taste of what this branch of economics is about.  Also go the to Behavioural Economics page of  Mark Johnston’s indispensable blog, and you will find some fascinating reading including the ílliquid cow’ article below.

illiquid cow


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