Neoclassical economics has been the main way we think about how the economy works for a long time. It says that people are logical agents who make choices based on perfect knowledge and their self-interest.
Behavioral Economics, on the other hand, is a new challenger that looks at economics from a different angle by combining psychological observations with economic analysis.
Critics might say that behavioral economics puts into words what we already know from common sense and observation, such as how choices are presented can affect how people choose or that we don't always make decisions that make sense. Businesses have used these habits for a long time to make as much money as possible. Companies have been using behavioral economics without calling it that. For example, they put tasty snacks at the checkout counters of grocery stores, make detailed lists for restaurants, and take advantage of people's fear of losing money in gaming places.
But behavioral economics does more than name these things. It also provides a theoretical framework that can predict, study, and reduce the effects of illogical behavior on financial results.
Critics also say behavioral economics doesn't look very deeply into "why" people act as they do. It doesn't use studies from psychology, sociology, and anthropology that could help us understand why people work the way they do more ultimately. Instead, behavioral economics is often seen as a way to improve traditional economic theory by making it fit a more realistic view of how people act.
Even though behavioral economics mostly looks at how people act in ways that aren't logical without necessarily looking into why, it wouldn't be fair to write off the field as a polishing exercise. The study of these differences has big effects on economic theory and strategy. Behavioral economics tells us that we need to rethink basic economic structures by showing how flawed the traditional idea of perfect reasoning is.
The rise of behavioral economics calls into question the basic ideas behind the neoclassical model, especially since market results are always logical, efficient, and fair. If people are sometimes rational and markets, like stores, aren't neutral but carefully built to influence choices, we can't count on needs to deliver justice or economy.
When people realize this, their whole view of the economy changes.
Behavioral economics sees people as something other than reasonable decision-makers. Instead, it looks at how people make choices that don't make sense. Policy advice is no longer about making rules to help people make the most logical decisions. Instead, it's about creating choice architecture to help people make rational decisions.
This change could have big effects on society as a whole. If customers need to be protected not only from unfair market practices but also from their illogical tendencies, this suggests that the government and policymakers should step in more. They must not only stop people from being manipulated but also help people make smart decisions, even when they don't want to.
Critics say that behavioral economics doesn't teach us anything new, but the field's importance and promise go far beyond just pointing out that we are only sometimes logical. One of the most important things about behavioral economics is how it affects society, especially when making policies and designing institutions.
Behavioral economics looks at people as flawed, unreliable, and affected by bias and irrationality and comes up with a whole new way to help the economy. This way of thinking has been called "libertarian paternalism" in everyday language. It is a point of view that argues for assisting people to make better choices while keeping their freedom of choice. These measures, often called "nudges," have been used extensively in many policy areas, from public health to retirement savings.
This new way of looking at things has big effects on how the government and policymakers are seen and how they affect the economy. Under neoclassical principles, economic involvement was often seen as a force that made things worse in the past. It was thought that the market, led by an "invisible hand," was the best way to divide resources, and government involvement was often seen as needless meddling. Behavioral economics, on the other hand, shows a different picture. Suppose markets and decisions aren't fair and are instead biased in a systematic way. In that case, it's up to the government and policymakers to fix these problems and steer society toward more reasonable, efficient, and fair results.
Behavioral economics challenges the basic ideas of perfect reason and market efficiency. This opens the door to a more interdisciplinary looking at economic events. Even though behavioral economics has mostly stayed within the boundaries of economic theory, its focus on how people act in ways that don't make sense gives it a key link to other social sciences. Psychological, sociological, and anthropological ideas could add a lot to studying how people act in economic situations. This mix of points of view could help us understand economic behavior and its effects in a more complete and complex way.
Also, behavioral economics gives a more equal view of economic power.
In traditional economic theory, the responsibility for how the economy works is put on each person's choices. If a person doesn't do well in life, they didn't make the right choices. On the other hand, behavioral economics recognizes that people act within a system they didn't create, and that their decisions are affected by many things they can't change. This point of view can lead to more kind policies that consider the social barriers to success.
In conclusion, behavioral economics might not be saying anything new about how people act, but how it is used and incorporated into economic theory shows a big change. It gives us a lens through which we can see how the economy works, not how we think it works. It's an area that has the potential to not only make the economic theory more based on reality but also help make structures and policies that better reflect and cater to the complexity of human behavior. By taking this method, behavioral economics could change the way we think about economics and make it a more reasonable, inclusive, and humane field.
So, behavioral economics is much more than just a collection of observations about how people act in ways that make sense. It's a new way of thinking that questions long-held ideas about logic, markets, and the role of the government. It recognizes that people make mistakes and accepts that making decisions is hard. Doing this opens up new ways to understand economics in a more detailed and realistic way, which could lead to more effective and fair economic policies.
Art: midjourney.com