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Showing posts with the label behavioral economics

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Random Musings on Economics

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  Economics deals with behavior of agents as stated many a times in the past posts. The agents might be individuals, groups of individuals, organizations, families, society, castes, classes, institutions, nations, economies and what not. There might be a behavior observed under individual conditions and something under aggregate conditions. There is behavior which might be innocuous or something independent when viewed through the prism of an individual yet the same when aggregated might result in a totally different behavior. The motives might be micro yet the aggregate behavior might result in something of a macro outcome. It might be simple decision to park a car at some place which if followed by others might set a pattern and thus a macro behavior of sort would emerge. If somebody were to venture a question on why the king has no clothes, there might be no answers. As the economists, Thomas Schelling once remarked, he was addressing a session and he found the first eight rows were
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Economics and Ergodicity

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  Economics posits human behaviour and thus human actions on the premise of utility maximization. Therefore, the next step obviously was in calculating the expected utility. The expected utility theory posits the economic agent being rational will evaluate all possible outcomes of his or her action and the probability of their occurrence before determining their action. In other words, the probability of the expected outcome will determine the trajectory of behaviour on the part of the economic agent. If the agent feels the probability is skewed towards a positive payoff, they will go ahead with the action else they are likely to adopt a risk averse attitude and go with the contrary action. Yet in real life, experiments have indicated something to the contrary. While mathematically the actions do point towards a probable positive outcome, the agents however shirk from undertaking those actions. These have been explained through models like prospect theory in behavioural economics. Whil
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