Answer to Question #182644 in Microeconomics for Litz

Question

Chapter 8 of the text provided the student with some general themes and ideas that have been developed by the behavioral school of economics. For this paper, the student should take that information as a base of knowledge and expand upon it by researching(at least 5 additional resources) the origins and evolution of the behavioralists. Some of the main items that you should fully address in the paper include:

• Leading figures in the school of thought and their hypotheses, theories, works and awards (particularly the nobel prize).
• Discussion of divergences from neo-classical theory
• Framing and advertising
• The endowment effect
• Anchor pricing
• Implications for business strategy and public policy under neo-classical and behavioralist assumptions(which would require more regulatory involvement?).

 

Answer 1

The emergence of behavioural economics is associated with desire of the economic theory to find an explanation for the existing paradoxes, which cannot be clarified from the standpoint of the classical economy. To solve this problem, achievements of other sciences and psychology are used.

The first stage (propaedeutic stage), directly connected with economic psychology, allowed authors to analyse the theory of expected utility and the theory of subjective expected utility from the psychological point of view. It revealed abnormal facts in the economic behaviour of individuals.

The second stage (origin of behavioural economics) is closely connected to A Dynamic Theory of Personality by Kurt Lewin. Precisely at this stage the fundamental scientific schools were formed: a school of Carnegie Mellon University, which studies behaviour of companies in markets, and a Michigan School, which concentrated its attention on the behaviour of consumers.

The third stage (formation of behavioural economics) integrated economic theory with cognitive psychology and mathematical psychology. It allowed explaining rational and irrational economic decision-making.

The fourth stage (development of behavioural economics) is associated with the application of mathematical tools of game theory in economic theory, particularly in the sections that explain the strategic interaction of economic agents at different levels and in different conditions.

The fifth stage (expansion of behavioural economics) is due to the influence of achievements in psychophysiology, neurophysiology, and neurobiology and makes it possible to create a new direction in the behavioural economics – neuroeconomics.