Behavioral Economics vs. Conventional Economics
Behavioral economics enriches the conventional economics toolbox by incorporating insights from psychology, neuroscience, sociology, politics, and the law. The result: more vibrant and revealing economic analyses based on more realistic assumptions about how individuals behave in the real world and the real-world circumstances that influence the decisions they make.
|Conventional Economics Says . . .||Behavioral Economics Says . . .|
|For economic analysis, the assumptions made about people
don’t have to be realistic.
|For economic analysis, the assumptions made about people must
|People are endowed with the capacity to efficiently and
effectively acquire and process all relevant information.
|People are not endowed with the capacity to efficiently and
effectively acquire and process all relevant information. People
are referred to as being boundedly rational — they do the
best they can, given the constraints they face.
|People can figure out and factor in the future consequences of
|People aren’t always able to figure out the future
consequences of current decisions, especially in a world of
uncertainty (in other words, the real world).
|People always make smart decisions, ones that they don’t
|People can and often do make decisions they end up
|People always make decisions in an ideal decision-making
environment, where they have all the information they need and the
time to make the best possible decision.
|People often face decision-making environments that prevent
them from making the best possible choices.
|Wealth and income maximization are all that matter.||Wealth and income maximization aren’t the only things
that matter. Being fair, doing the right thing, maintaining a good
reputation, and pleasing friends, neighbors, and partners are also
important, even if they come at the expense of some wealth or
|Relative positioning isn’t important. It doesn’t
matter how much money your neighbor makes; all that matters is how
much you make.
|Relative income can be as important to people’s happiness
as absolute income. People derive happiness from earning more than
other people do.
|People aren’t influenced by anyone or anything else.||People are influenced by their peers, by their past, and by
|People are narrowly self-interested, and this is the only
rational way to be.
|Many people are narrowly self-interested, but altruism and
ethics also can be important motivators for behavior.
|How hard and well people work is assumed to be fixed, usually
at some maximum point. Therefore, people don’t change how
hard they work and productivity can’t be affected by the work
|How hard and well people work is determined by their work
environment and by their individual preferences. As a result,
productivity, costs, and prices can be affect by the work
|People are pretty much all the same.||People are different, with different tastes and
|Markets are efficient, even if they appear to be inefficient.
Efficiency is everywhere.
|Markets can be highly inefficient, and if they look
inefficient, they probably are.