5 Questions
Which field of economics focuses on the psychological, social, and emotional factors that influence decision-making?
Behavioral economics
Why did generations of economists choose to ignore irrational elements of decision making?
It makes it harder to predict human behavior
Who discussed the irrational elements of decision making in The Theory of Moral Sentiments in 1759?
Adam Smith
What is the main assumption that economists make when creating models?
People are predictable
What has made a comeback in the last few decades?
Behavioral economics
Study Notes
Behavioral Economics
- Focuses on the psychological, social, and emotional factors that influence decision-making, differing from traditional economics which assumes rational decision-making.
Development of Behavioral Economics
- Generations of economists chose to ignore irrational elements of decision-making, assuming that humans act rationally and in their own self-interest.
- In 1759, Adam Smith discussed the irrational elements of decision-making in The Theory of Moral Sentiments, a precursor to modern behavioral economics.
Economic Modeling
- The main assumption that economists make when creating models is that humans act rationally and make optimal decisions.
Resurgence of Behavioral Economics
- In the last few decades, behavioral economics has made a comeback, recognizing the importance of psychological, social, and emotional factors in decision-making.
Test your knowledge of behavioral economics and learn about how people's impulsive and irrational behaviors can impact economic decision-making.
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