Essay on Behavioral Economics

 

Richard H. Thaler is an American economist and the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. In 2015, Thaler was president of the American Economic Association. Thaler is a theorist in behavioral economics and has collaborated with Daniel Kahneman, Amos Tversky, and others on multiple occasions in further defining that field. In 2018, he was elected a member in the National Academy of Sciences. In 2017, he was awarded the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics. He combines a diverse range of insights from across the social sciences—including economists’ powerful analytical tools alongside rich evidence about real human behavior from other social sciences—especially psychology and sociology. 

In the 2018 Ryerson Lecture, he had a presentation about Behavioral Economics and Past, Present, and Future. Speech is started from definition of Behavioral Economics. I examined part by part to this speech. In first part, Richard start to speak about some important people and ecole about Behavioral Economics. Today, it seems as though everyone is talking about behavioral economics.  From Thaler opinion, Adam Smith who is the founder of economics, is also founder of Behavioral Economics. In order to being a Behavioral Economist, need to have three codes which are overconfidence, loss aversion and self control. These are the core ideas of Behavioral Economics and Smith had them. Besides, there are lots of Economist who had these properties but Adam Smith had them all first. From the nineteenth century onward, economics started to move away from behavior as it might be richly understood in terms of the psychology of choice toward observed choices as a measure of revealed preferences Then, he touch on about Keynes, from his opinion he is Inventor of Behavioral Finance, mentioned economics is just behavioral until Keynes. When he speak about next Early Behavioral Economist, touch upon Pareto. He thinks every social sciences evidently psychology. His things about in future everybody think and decide about psychology of principle. Next, he touch briefly University of Chicago’s importance of economics literature. Modern behavioral economists have taken this further by bringing together rich insights from psychology to capture how economic incentives and motivations are changed, often fundamentally, by psychological influences.

In second part of lecture, Thaler start to define assumptions of economics which are called optimization, consumer sovereignty, unbiased beliefs and self interest. For customer, never choose which one is wrong for them, people’s future expectation is also unbiased, people only careful themselves that’s why self interest assumption is active in their decision and in that context cut in Behavioral Economics. From his side, there is no a model of human behavior because of two reason, firstly, some tasks are harder than others and secondly some people are smarter than others. That’s way economics is not theory about experts, is theory about everybody because of human attitude. Whatever people do, they learned something from everything then behaved in markets the way they do their experiments. Therefore this type of unexpected behavior of people create a uncertanity. For this reason, Richard said need to have seriously expanded data in addtion to this data must use in optimization with tools in order to do qualified predictions. These include behavioral analyses of incentives/motivations; social influences; heuristics, bias, and risk; time and planning; and impacts of personality and emotions on decision-making. He mentioned on stakes. To understand of stakes of people is significant to have diversity type of behavior then predict something from their behavior. Some game which is about chance shows very well the people of emotion when you look at the their face or their movement.

The third part of speech, he mentioned The Efficiency Market Hypothesis which is created by Fama. The EMH is generally based on the belief that market participants view stock prices rationally based on all current and future intrinsic and external factors. When studying the stock market, behavioral finance takes the view that markets are not fully efficient. In pricing, there are some factor which is irrelevant these are sunk cost, framing and mental accounts. Retirement saving is directly about as upon human behavior cause first of all doing math is hard to most people and second it’s hard to delay your gratification and cost. It’s exactly seperated these type of two people saving cos retirement or not. Health insurance is also another one that shows to people decision.

Concluding his comments, he said there is one theory but tasks. For first task, Standard theory are useful, in fact essential but they often fait to describe behavior. Point two, there is no necessarily rational theory based on rational choice. The future thing of behavioral finance is examine optimization of behavior and it nudge to good from his opinion. Another presentation title is Applying Behavioral Economics to Real World Challenges who is presented at TEDxUtrecht by Kelly Peters who is CEO and CoFounder, BEworks, Pioneer in Behavioral Science, Researcher; Educator. She talked about risk and opportunity is mainly about being risk averse. Different type of the risks always open a door of new thing and these new thing creates a new opportunity to people. Taking diversity of decision making process is effected by age and which situation you are in personally.

Daniel Kahneman is an Israeli psychologist and economist notable for his work on the psychology of judgment and decision-making, as well as behavioral economics, for which he was awarded the 2002 Nobel Memorial Prize in Economic Sciences (shared with Vernon L. Smith). His empirical findings challenge the assumption of human rationality prevailing in modern economic theory. He talked Amundi World Investment Forum about Behavioral Finance in 2018.

Today is not liquidity issue is about decision and rational people issue is so important in economics situation. Actually stocks buy or sell decision is changing upon on this thinking of people. For individual insvestor is difficult to understand their attitude of meaning seperately. However, you can understand their situation when you formulate to their behavior sociologically. Vast the many of practice with immediately feedback, has to be clear, rapid provide to us important information about behavior of finance. In their decision making is affects with the most significant thing about being risk averse or not.

In BBVA OpenMind Articles, there are some article which is about Behavior Finance. In that article, they mentioned some important issue about that. Incentives and Motivations, Social Influences and Time and Planning. As we noted above, economics is essentially about incentives and motivations—traditionally focusing on money as an incentive, for example in explaining a decision to work as a balancing act in which wages earned persuade workers to give up their leisure time. Psychologists bring a broader understanding of motivation into behavioral economics—specifically by disentangling extrinsic motivations from intrinsic motivations. Economists have analyzed this phenomenon in terms of updating our estimates of probabilities—and a classic example outlined by Abhijit Banerjee is restaurant choice is about social influences.

All these insights from behavioral economics are now changing mainstream economics, and also having a strong impact on policy-making via nudging, as highlighted in the introduction. When we are doing something on behavior finance, we can use also new methods and methodologies. Such as machine learning and deep learning.

A significant hurdle for behavioral macroeconomics, however, is that it is difficult coherently to aggregate into a macroeconomic model the complexities of behavior identified by behavioral economists within a microeconomic context. New methodologies are coming on board however, for example in the form of agent-based modeling and machine learning. If these new methods can be applied successfully in developing coherent behavioral macroeconomic models, then behavioral economics will generate an even more exciting and innovative range of insights in the forthcoming decade than it has in the last.