Question

1. Many economists believe that you cannot judge the usefulness of a theory based on the realism of its assumptions, and so the standard assumption that people are motivated by “rational self-interest” should not be dismissed so easily. Yet behavioral economists claim to have solid evidence that contradicts the assumption of “perfect” rationality. But the authors of the textbook dispute the validity of that evidence. For each of the following, briefly explain their arguments:

1. The reliance on laboratory studies (6)

2. The human brain’s internal inclination to correct bad decisions (6)

3. Errant decisions, entrepreneurs, and market pressures (6)

Answer 1

Behavioral Economics is the important subjective part of Economics which deals with the Human nature of wants and willingness to achieve the certain goals. It can be explained by the way of meausring the feelings of the human nature by psychological, Traditional Customs and Emotional relation bounded metrics.

The Behavioral Economics are interrelated with the Rational Self-Interest. The Rational Self-interest is nothing but the in-depth thought of the decision making process with or without average knowledge. In the dyanmic world no Human Being have such a broad insight of the knowledge to solve the problem with prudence knowledge of Wisdom. So Perfect Rationality will not always reaches the Saturity Point at any level. It may be coincided with any field of knowledge. Like Sports, Music, Academics, Law, Politics, etc.

Based on the above facts, Let us briefly explain their agruments with the above given points.

1. There can be more reliable situation occurs when the empirical studies prove the Perfect Rationality with certain Assumption. But in the Modern World, The Real Problems only poses serious threat of fullfilling the Human Wants. So the Assumption of attaining the human goals with the full rate of Desire will get failed because with the help of his own desire He cannot satisfy himself. Many Practical factors like Situation of Environment, Political, Socio-Economic Factors, Factors of Production will be taken into the account. Though many Economic Labs of the Universities may furnish the data for factors determining Perfect Rational Thinking. But it cannot be achieved with the full satisfication.

2. The Human Psychology exposure is not a constant one which determines the Correct or Bad decisions at all the times. All the positive and negative vibration are occupied in the Human brain in order to take the decision rationally without any false outcome. Here the broader outlook is very important to judge the normal inclination to take correct or bad decisions. The Normative Economics is the study of Judgements to take decisions which deals with the subjective value of justifiable things. For example, When the Govt wants the people to have disposable income, then it should provide Tax Subsidies to the people. Then the people will have save the money more and have sufficient income. If the Govt has took decision is broader in the sense the result will be positivie. But if the Govt. behaves in the crucial way of Levying more Tax to pay then the common people will suffer. So unless the the President nor the Prime Minister of the particular country have the Prudence knowedge brain to take good decision, The results will have bad effect. So it is prooved that inclination of human brain has direct effect to arrive on good nor bad solution.

3. Let us discuss the impact of Rational Behaviour in the Economic Jargon situation. The World Market have few types of Market. They are Perfect, Imperfect, Oligopoly and Monopoly Market. All Markets are have distinct features of their own. But they have the main motto of attracting the customers and earning huge Profits in the long-run. The firms in all types of market need to analyze the demand of their own Products. In this situation the Entreprenuers of all the Markets are in the position to take rational decision to capture the Markets. At the same time they cannot able to exploit the labourers work in order to produce more output in order to satisfy the consumer needs. But Some Entrepreneurs without thinking about the Pain of the Labourers will take hasty decisions and thus Labourers will switch to other companies in order to escape from the exploitation from the previous Entrepreneurs. So from the above facts it is prooved that the Errant Decisions and Market pressures may strongly influence the Rational Behaviour of the Entrepreneurs in Positive or in Negative Way.