Question

What is behavioral economics? Explain your answer in at least a paragraph.  How is it different than standard economic theory? Explain your answer in at least a paragraph. 

Answer 1

Economics is relatively a new field of study which is majorly dealing human and their chiice output which is put forward given the bundle of choices. These studies are conducted under a definite set of assumptions and choices . Economics study provides the optimal output for a similar condition, along with the other set of options which an individual can choose from. The choice is not limited to individual but also the group of individuals working towards same interests and ideas like a firm or industry , which works for profit. Economics is the study of individuals and to tap into this aspect of study, the need to study the behaviour of individuals rose in order to diversify the aspects and dimensions . Hence psychology is used , as to understand why and how the individual is reaching to a conclusion. This is infact what we call behavioral economics. Behavioral economics is the new horizon, when it comes to the list of noble prize winners , who have been constantly trying and incorporate the decision made by individuals and provide a mathematical Explanation to it. The idea of understanding the human choices might sound diverse as zillion of factors impact the human decisions, but the study of behavioral economics taps into those major factors which primarily influence the decisions , under the given assumption of rationality.

Although the combination of economics and psychology might seem something new but even the primitive economist like Adam Smith , also put forward ideas of merging psychology and economics concept in his book theory of moral sentiments . Microeconomics concepts like intertemporal choices , utility function etc are also studied with a lense of behavioral economics relaxing certain assumptions like selfish motives while making decisions and understanding impact of society while making decisions etc.

The question arisis how behavioral economics is different from standard economics theory. The analysis to this , in simple terms is that's behavioural economics puts in additional analysis of how and why the decisions are made while on other hand standard economics just put out the combination of decisions and other choices the Individual had while making the decision. The decisions are labelled optimal or the most efficient while behaviour economics trying to understand why and under what circumstances did individual reach to the given conclusion and conclusion can be optimal or not, the problem which is tackled by adding the idea of rationality in individual.

It is clear from above discussion how the difference prevails between the two theories, but it must be understood that while micro economics theory and macro economics theory is important in order to understand the different possibilities and the dimensions of the world, behavioral economics is important to understand how and why the conclusion were made and what might be the future if development towards where individual and society is leading to.