Behavioural Economics Research Paper

Behavioral Economics
(By Souhardya Roy)

Introduction:
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 information in the

Our willingness to take risks is influenced by the way in which choices are framed, i.e. it is context-dependent. Responses are different if choices are framed as a gain or a loss. When faced with the first type of decision, a greater proportion of people will opt for the riskless alternative, while for the second problem people are more likely to choose the riskier. This happens because we dislike losses more than we like an equivalent gain: Giving something up is more painful than the pleasure we derive from receiving it.
Bounded Rationality:
The importance of psychologically informed economics was later reflected in the concept of ‘bounded rationality’, a term associated with Herbert Simon’s work of the 1950s. According to this view, our minds must be understood relative to the environment in which they evolved. Decisions are not always optimal. There are restrictions to human information processing, due to limits in knowledge (or information) and computational capacities (Simon, 1982; Kahneman, 2003).
Ecological