Question

Reflection Question: In your own words describe behavioral economics and explain how it contrast with neoclassical economics. Limit your response to one paragraph.

Answer 1

• Traditional economics treats humans like robots devoid of their vital strengths and weaknesses. However, a branch of economics called Behavioural Economics(BE) models humans the way they are, with all their idiosyncrasies.
• Human choices are driven and limited by the mental resources i.e. cognitive ability, attention and motivation.
• Drawing on the psychology of human behaviour, behavioural economics provides insights on ‘How to nudge people’ towards desirable behaviour, by incorporating innovative interventions in policies.

How it contrast with Neo classsical economics(NCE)?

• NCE assumes that all agents act rationally in their own self interest while BE emphasizes altruism i.e. when human behave with more kindness and fairness than would be the case if they behave rationally.
• NCE has been for decades wedded to "Homo Economicus” (a selfish and utility-maximizing, unboundedly-rational agent).
• In NCE agents choose independently while BE limits computational capacity - they aim to satisfy rather than maximise.
• In NCE agents has fixed tastes and preferences wile BE strongly influenced by social networks.
• In NCE agents always make optimal choice given his/her preferences while BE are loss averse - hating losses far more than commensurate gains.