Behavioural Economics and Practicalities of Intervention

Behavioural Economics and Practicalities of Intervention

This chapter gives a discussion of several theories of economics that relate to the ways in which people act within the economic system. Given that economics is a social science, human behaviour is a crucial factor in determining the systems which we observe.

Prospect theory is presented as an explanation of how people make decisions using heuristics to identify probable outcomes.
A reference point is taken, and outcomes are compared against this reference in terms of gains or losses. It is also considered that typically losses are felt more severely, and so actors tend to be loss averse.

Following this behavioural finance is discussed, which offers a view on the psychology and social factors that affect the actions occurring within economic systems. For example, it is noted that this affects the decision making in market situations as well as public policy decisions. This indicates the diversity of areas which human behaviour affects within the economic landscape.

Intertemporal choice considers how decisions are made across the time variable, with investment and payout typically being delayed. A traditional approach is the use of discounting applied to the utility of outcomes occurring in the future. The chapter then presents a series of new theories and developments on intertemporal choice from a range of authors. An example of this is Hyperbolic discounting, considers how discount rates may be dynamic when considering utility, and could vary across the time of the commitment.

Public choice theory considers how behaviour affects the political system, which is of course relevant to the macroeconomy. Public bodies must make decisions on how to allocate public funds, and thus control significant investment power, they also may control regulations which will impact the economic functions as well as the available options for actors.
As a result, there are efforts exerted from agents and pressure groups attempting to influence public policy. A central tenet of economics is that individuals have rent-seeking behaviour, that is they seek to acquire maximum returns on their resources. This extends to politics, where groups will seek to gain political advantage and convert this to economic advantage.

Overall, this chapter outlines a wide range of areas where behaviour influences the economic system, and is a strong demonstration of the need to look at the assumptions underlying the familiar economic models.


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