Behavioral Economics Challenges the Rationality of Consumer Choices
A relatively new area of study in economics, behavioral economics, has started to gain popularity. The behavioral economics framework emerged because of dissatisfaction with the neoclassical theory regarding consumer choice. A major problem with the neoclassical theory is that human beings are presented as if hardwired with a scale of preferences. Regardless of circumstances, this scale is considered to remain the same at all times.
Mainstream economics argues that, if preferences are constant, it is possible to compress preferences into a mathematical formulation called a utility function. Similarly, the assumption of constancy is considered an important characteristic of rationality.
According to behavioral economics, however, human beings are not considered rational actors. behavioral economists consider emotions to be the key drivers of consumer choices. Furthermore, whether or not consumers are patient determines whether they are inclined to spend or save money on a given day. If they patient and save more money, entrepreneurs can generate funds for new investment projects.
Also, behavioral economists emphasize the importance of personality. Emphatic people are more likely to make altruistic choices. Impulsive people are more likely to be impatient and less likely to save money for retirement. Venturesome people are more likely to take risks and gamble. Behavioral economics reduces people to emotional archetypes and assumes they act in accordance with their emotional type in a consistent manor.
Obviously, once reason is dismissed, humans can be treated like objects. Human action is driven by external factors. By means of a given stimulus, one can observe various human responses and draw all sorts of conclusions regarding the world of economics. According to Ludwig von Mises, “it is impossible to describe any human action if one does not refer to the meaning the actor sees in the stimulus as well as in the end his response is aiming at.”
Introducing Psychology in Economics Will Not Make Economics More Realistic
Psychology plays an important role in behavioral economics; however, there is a distinct difference between these two. Psychology deals with the content of ends an
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