Behavioral Economics: The Dual System Theory

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Behavioral Economics
(By Souhardya Roy)

Behavioral economics uses psychological experimentation to develop theories about human decision making and has identified a range of biases as a result of the way people think and feel. BE is trying to change the way economists think about people’s perceptions of value and expressed preferences.
According to BE, people are not always self-interested, benefits maximizing, and costs minimizing individuals with stable preferences—our thinking is subject to insufficient knowledge, feedback, and processing capability, which often involves uncertainty and is affected by the context in which we make decisions.
Most of our choices are not the result of careful deliberation. We are influenced by readily available information in memory, automatically generated affect, and salient
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The Dual System Theory:
Daniel Kahneman uses a dual-system theoretical framework to explain why our judgments and decisions often do not conform to formal notions of rationality. System 1 consists of thinking processes that are intuitive, automatic, experience-based, and relatively unconscious. System 2 is more reflective, controlled, deliberative, and analytical. Judgments influenced by System 1 are rooted in impressions arising from mental content that is easily accessible. System 2, on the other hand, monitors or provides a check on mental operations and overt behavior—often unsuccessfully.
Temporal Dimensions:
Another important domain of Behavioral Economics introduces a time dimension to human evaluations and preferences. This area acknowledges that people are biased towards the present and poor predictors of future experiences, value perceptions, and behavior.

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