Behavioral Economics, Economic Theory and Public Policy
Australasian Journal of Economic Education, p. 50, 2008
Posted: 18 Jan 2010
Date Written: 2008
The focus and contribution of behavioural economics is discussed in detail focusing on its varied contribution to economic theory, economic analysis, and public policy. Recent contributions related to the work of Kahneman and Tversky's heuristics and biases paradigm are critically assessed in the context of the much wider scope of the behavioural line of research that ultimately flows from the empirically based understanding that the realism of ones simplifying assumptions matter for the construction rigorous economic theory. Such assumptions are not only psychological in nature, but also biological, sociological, and institutional. Moreover, behavioural economics is much more than consumer behaviour and behavior on financial markets, a preeminent focus of contemporary behavioural economics. It is also very much concerned with theories of production, theories of the firm, household behavior, and institutions. Findings of behavioural economists tend to refute the notion that individuals behave neo-classically, giving rise to a literature and debate as to which heuristics and sociological and institutional priors are rational, which yield optimal economic results, and which tend to improve socioeconomic welfare. Although many contemporary behavior economists argue that individuals are fundamentally irrational because they do not behave neo-classically, a forceful narrative remains which considers non-neoclassical behavior rational, yielding optimal economic results under particular conditions. A common thread running through behavioural economic is that modeling assumptions matter and that conventional theory is seriously wanting in this front with significant implication for economic analysis, theory and public policy, some which are discussed in this article.
Keywords: Behavioural Economics, Public Policy, Theory, Modelling assumptions, Consumer behaviour
JEL Classification: A20, B41, D10, D20, D60, G00, H10, J30, J50, K00
Suggested Citation: Suggested Citation