![]() The way the mind works, according to this view, may seem inconsistent to traditional economists but is actually far more complex than an unemotional cost-benefit adding machine. This can lead to decisions that appear outwardly inconsistent, or irrational, to the outside observer. ![]() It does this by investigating how given dollar amounts can mean different things to individuals depending on the situation. So, behavioral economics seeks to enrich the understanding of decision-making by integrating the insights of psychology into economics. And what’s more, actions under these conditions are indeed predictable, if the underlying environment is better understood. These are not necessarily irrational states of mind, but part of a range of emotions that can affect anyone on a given day. For example, one can think differently about money if one is feeling revenge, optimism, or loss. (In fact, economics professors often delight in pointing out so-called “irrational behavior” each semester to their new students, and present economics as a way to become more rational.)īut a new group of economists, known as behavioral economists, argue that the traditional method leaves out something important: people’s state of mind. The traditional economic models assume rationality, which means that people take all available information and make consistent and informed decisions that are in their best interest. People’s decisions can seem inconsistent from one day to the next and they even deliberately ignore ways to save money or time. Behavioral Economics: An Alternative ViewpointĪs we know, people sometimes make decisions that seem “irrational” and not in their own best interest.
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