Realistic assumptions (Standard econ: unrealistic assumptions) uses psychology to fill the gap.
Predictions can be tested in labs (controlled studies). Observational and experimental studies can be conducted
Field experiments: conducted in real-life context. e.g. Farmers in "the field"
Incorporates neuroscience knowledge in relation to psychological process. (not dealt in much> Focused more on field experiments)
Cynical view: Repackaged psychology, couched in terms that appeals to economics. To impress those in business and government (who don't care about psychology). far from being the whole story, not just psychology (again subjective)
BE vs Behavioral Science
Science applied to problems of economics: "choice under uncertainty to maximize benefit by optimal allocation of scarce resources"
Not all BS is used in BE... example (it includes not only psychology but also communications science)
Application
COVID-19, lifestyle habits changed due to incentives (live longer)
maximize utility of living longer
people had to make choices under considerable uncertainty (will I die?)
"Behavioral fatigue" (?)
Utility is Not just about money, but also life and death
Many instances when utility isn't just about money
Behavior in Economics
Adam Smith: system of various hidden components (government: Taxation on sugar to discourage consumption, taxation on alcohol, increase govt revenue and discourage consumption)
Greater aggregate benefits through the pushes
Economic system are influenced and defined by their behavior
People's civic sense (corruption & crime) drive the system
People act as active agents
Conflicts
Psychologists vs Economists (way they think, theorize and research method)
"Such ideas have little to do with real economists"
But there are also people of economics background who aren't satisfied with the assumption of classical economics
BE without economics background, want a completely new framework (disregarding the mainstream economics, unlike others who wish to merge them)
Why BE?
Some odd facts that the mainstream economics struggle to explain: misbehaviors
New Year's resolutions (why do we make a resolution when we fail to make them?)
If we know that it's good for us (utilize), why do we fail to get them done?
Why do people fail to save for their retirement, when they know that its for their own good?
We procrastinate, misjudge probabilities, suffer from biases and conform to an image of an idealized rational economic agent.
Why do we make wrong decisions systematically?
ECON vs HUMAN?
ECON (homo economicus) and HUMAN (homo psychologicus)
ECON: how mainstream economics expects us to behave? (Cold rational, calculating and self-interested being)
HUMAN: Emotionally warm and sometimes hot (angry). Limited by processing capacity.
Sometimes we make mistakes on charity, where people cheat on us.
We do things for family that might not be the best for us
BE is concerned with HUMANs
ECON is not influenced by states of the body, mood, emotion and such like.
"...economists have devoted themselves to study fictional creatures" Richard Thaler
Why does ECON Exists?
Science works by holding assumptions \(\implies\) reduce complexity, more abstract
mathematical prowess \(\implies\) badge of respectability in the economics profession (Career enhancing)
Mathematical notation charmed and impressed and also intimidated those who challenged its basic tenets and general worldview
Does ECON exist in Reality?
Then we don't need BE. Mainstream would prevail!
Mainstream economics accepts that HUMANs exists and assumes that it aspires to be an ECON. (Perfection!)
Some BEnomists believe that ECON is fairy tale
Sometimes we are HUMAN, sometimes ECON
"you cannot deduce ought from is" David Hume, 'A Treatise of Human Nature' (1738) (Normative vs positive)
Misbehaving
2016 book by Richard Thaler
SIFs
96/137 (70%) is preferred over 72/100 (72%). BIASES!
96 is bigger than 72. We would need a calculator to find out the % immediately.
Saving $10
10 minute drive to save $10
~~$45~~ $35 is preferred savings over ~~$495~~ $485 even though its the same amount of savings, we look at it in % terms
SIFs are Not Recognized by Mainstream Economics
Optimization problems are actually too hard for normal people to solve
Overconfidence influence our decisions
Money in Mainstream vs BE
Mainstream: "Willingness to pay" is the amount of money a person is willing to pay to obtain a good service or avoid a bad outcome.
BE: Camerer, Babcock, Loewenstein and Thaler
Tax-drivers set a target for themselves, and stopped driving once reached.
When weather conditions were optimal (on a rainy day, they could earn more). They decide to stop once they reach target, even when for the same amount of work, they do on any other day, they could have obtained higher income.
The reason for this is that utility is not measured only in terms of money, but also leisure.
Allocate their scarce resources: time and effort
Spending time with their family might be more valuable
More: chances of accidents might be higher, from this we may get greater disutility, which disincentivizes to work more.