Module 6: Economic and utilitarian theories
  Lecture 17: Value Economy

Behavioral economics

In the context of welfare it is quite pertinent to talk a little bit about behavioral economics. This is a new branch of economics that has benefited not only from cognitive revolution but also from inclusion of neuroscience (neuroeconomics), political choices, the idea of cognitive dissonance (that beliefs are often modified to adjust to behavior), and affect (from psychology). It is recognized that people often make suboptimal decisions and there may be a need to guide them (light paternalism) without restricting their freedom of choice or autonomy (Angner, 2011). Behavioural economists claim that to do good economics is to pay attention to good psychology (Camerer and Loewenstein, 2011). It claims that a realistic psychological foundation will improve the applicability and explanatory power of economics.

Behavioural economics differs from the neo-classical economics on a number of points. The major ones are (Etzioni, 1988; Diamond and Vertiainen, 2007; Camerer, Loewenstein, and Rabin, 2004; Altman, 2006):

  • Neo-classical economics deals with structurally simpler problems than behavioural economics.

  • Behavioural economics recognizes that people act according to their wants but unlike the neo-classical economics it accepts that the wants cannot be coherently and neatly ordered and the wants are not only the result of the hedonist tendencies among men but they also include living up to moral values and acting in accordance with the norms of society. One cannot deny that on various occasions people show a lack of self-interest in decision making.

  • Behavioural economics claims that people use the optimum decision making in different contexts and the role of context cannot be ignored.

  • Behavioural economics recognizes the conflict between short term and long term interests.

  • Normally people use the most efficient means to attain their goals but the choices depend on their emotional states also. Humans often appeal to heuristics and rules of thumb. They do not always have complete information about the situation and means available to them.

  • Unlike neo-classical economics the behavioural economics treats people as members of a community and not atomic individuals free to take their independent decision. They have a tendency to treat others in a fair manner and also to be treated in a fair manner from others.

  • Behavioural economics also looks at the nature of coordination of a large number of economic activities that make up society, culture and polity.