Question

Raeworth’s approach in Chapter 3 can be considered behavioral economics. Provide a few examples of irrational or humanistic choices that consumers make and explain how these contrast with the neoclassical approach.

Answer 1

The irrational consumermake decisions based on feelings rather than facts. Consumers lack the resources necessary to judge the uncertainty a trust in different potentially unreliable resources.

example of irrational or humanistic choices that consumers make

if shares rise and people see an increase in wealth, this may encourage them to keep buying more. If prices rise above their long-term value, consumer  think 'this time is different', and perhaps there is some reason for the increased value of shares,this is a common occurence with people dealing in stocks and is often cited as a classic example.

consumer exhibit different types of irrational behavior

1. Irrational exuberance-Irrational exuberance is a term to describe over-optimism, especially about asset bubbles,the above cited exam-ple of stock can be considered an example of Irrational exuberance
2. Herding-herding is the notion that majority must be correct or in simple terms following the wisdom of the crowds
3. Cognitive bias-making decisions based on irrational assumptions,For example, we may focus on a study that says alcohol can be used as a first aid to treat bleeding but we make the assumption that drinking alcohol can treat internal bleeding.
4. Status quo bias-preferring a choice that we are used to Rather than spend time trying to decide, we stick with default option .

These are some of the most most common forms of irrational behavior the consumer exhibits

how these contrast with the neoclassical approach.

Neo-classical economics assumes that all agents act rationally in their own self-interest. neoclassical basis such as expected utility theory assume rational choice of subjects in the sense of an optimal choice according to neo-classical economics. Classical economic assumes that individuals are rational. However, in the real world, we often see irrational behaviour – decisions which don't maximise utility but can cause a loss of economic welfare.