Question

Explain the three elements of people's decision making process on which behavioral economists focus and what the consequences of this bounded rationality are for macroeconomic policymaking.

Answer 1

Behavioral econmics means telling about the effect of psychological ,cognitive,emotional,cultural and social factors on the decision of individual and institutions.its tell about how this decision changed.

There are three elements -

Heuristics -which is related to mental shortcut .it means people takes their decision without knowing anything .it can be say like rules of thumb.

Framing - this is like the collection of anecdotes and sterotypes that make up the mental filters individuals rely on to understand and respond to event.

Market inefficiencies - This is non- rational decision .market inefficiences includes mis pricing.

Bounded rationality -according to this our mind must be understood relative to the environment in which they evolved.As we know decisions are not always optimal.There are restrictions to human information processing due to lack of information or knowledge.

Basically rationality of decision depends on structures found in the environment.people are ecologically rational.ecological rational means when they make the best possible use of limited information processing ablities by applying simple logic that can leads to near optimal inferences.