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The secret of behavioral economics: Why do our decisions always deviate from rationality?
Since ancient times, the economics community has struggled with a basic question: When faced with choices, are people rational machines or emotionally driven creatures? Behavioral economics answers this question by delving into the psychological factors that influence individuals or institutions in their decision-making processes, including cognition, emotion, and social interactions, and revealing how these decisions deviate from the predictions of traditional economic theory.
Behavioral economics is dedicated to understanding why humans do not always make the most rational choices when making economic decisions, and all this is due to various psychological traps and cognitive biases.
The history of behavioral economics
The origins of behavioral economics can be traced back to 18th-century economists such as Adam Smith, who explored how desires influence economic behavior. By the 1970s and 1980s, behavioral economics was emerging as a well-established discipline. This field combines insights from psychology, neuroscience, and microeconomics to better understand human economic behavior.
Bounded rationality
Bounded rationality is a core concept in behavioral economics. It believes that the rationality an individual can achieve when making decisions is subject to the availability of information, cognitive limitations and time pressure. Herbert Simon put forward this point of view, emphasizing that when faced with choices, people may give up the optimal solution because of seeking convenience, which is called "satisfaction".
Bounded rationality states that decision-makers often do not properly evaluate all available options and instead choose an acceptable solution. Such a decision-making process may lead to suboptimal outcomes.
Prospect theory
In 1979, Daniel Kahneman and Amos Tversky proposed prospect theory, which uses psychology to explain deviations from classical theory in economic decision-making. They make three main points, including “loss aversion”—the pain of a loss outweighs the pleasure of a corresponding gain.
Promotion and Effectiveness
Nudge theory is the intersection of behavioral science and economics. It mainly explores how to shape the choice environment to influence behavior. This concept received widespread attention in Richard Thaler and Cass Sunstein’s book Nudge: Decisions to Improve Health, Wealth, and Happiness. The core idea of nudges is to change the choice architecture so that it motivates people to make more desirable choices.
Nudgement is not about coercion, but about designing an environment that allows people to make better decisions without coercion.
Challenges and Criticisms of Behavioral Economics
Although behavioral economics has gained considerable attention, it has also faced a lot of criticism. Critics doubt the science behind the push theory and worry that this way of manipulating choice could erode personal freedoms. They question whether behavioral economics can actually improve decision-making processes or simply replace previous theories.
Conclusion
The core of behavioral economics is to explore how humans' unique psychological and cognitive characteristics play a role in the decision-making process. Whether nudge theory or prospect theory, this field is causing us to rethink the nature of economic behavior. In the future, with the development of science and technology and the advancement of psychology, can we find a more rational method to understand the process of human decision-making?
