Traditional vs Behavioral Economics
Compare and contrast the assumptions and methods of traditional and behavioral economics.
Rationality
Psychology
Realism
Traditional economics assumes people are perfectly rational, have unlimited cognitive abilities, and always maximize their utility. Behavioral economics recognizes that people are human - they make systematic errors, have limited cognitive capacity, and are influenced by emotions and social factors.
# Traditional vs Behavioral Economics Comparison
economics_comparison = {
"traditional_economics": {
"assumptions": {
"rationality": "Perfect rational actors",
"information": "Perfect or near-perfect information",
"preferences": "Stable and consistent preferences",
"computation": "Unlimited cognitive abilities"
},
"methods": ["Mathematical modeling", "Equilibrium analysis"],
"goal": "Elegant theoretical predictions",
"strengths": ["Clear predictions", "Mathematical rigor", "Policy insights"]
},
"behavioral_economics": {
"assumptions": {
"bounded_rationality": "Limited cognitive capacity",
"systematic_biases": "Predictable errors in judgment",
"context_effects": "Decisions influenced by framing",
"social_influences": "Preferences affected by others"
},
"methods": ["Experiments", "Psychological insights", "Field studies"],
"goal": "Realistic understanding of human behavior",
"strengths": ["Empirical accuracy", "Policy relevance", "Predictive power"]
}
}
Bounded Rationality
Explore Herbert Simon's concept of bounded rationality and its implications for economic decision-making.
Bounded Rationality Components:
• Limited cognitive capacity to process information
• Satisficing rather than optimizing behavior
• Use of heuristics and shortcuts
• Environmental constraints on decision-making
Implications for Economic Theory:
• Markets may not always clear efficiently
• Information processing costs matter
• Simple rules often outperform complex optimization
• Context and presentation affect choices
# Bounded Rationality Framework
bounded_rationality = {
"cognitive_limitations": {
"working_memory": "Limited capacity for processing",
"attention": "Selective focus on information",
"time_constraints": "Pressure to decide quickly",
"information_overload": "Too much data to process"
},
"decision_strategies": {
"satisficing": {
"definition": "Choose first acceptable option",
"vs_optimizing": "Good enough vs best possible",
"advantages": ["Faster decisions", "Lower cognitive cost"]
},
"heuristics": {
"definition": "Mental shortcuts for decision-making",
"examples": ["Rules of thumb", "Pattern recognition"],
"trade_off": "Speed vs accuracy"
}
},
"economic_implications": {
"market_outcomes": "May deviate from theoretical predictions",
"firm_behavior": "Strategic simplicity often preferred",
"policy_design": "Must account for cognitive limitations"
}
}
Systematic Biases
Understand how cognitive biases create predictable patterns of deviation from rational choice.
Key Characteristics of Systematic Biases:
• Predictable and consistent across individuals
• Often unconscious and automatic
• Persist even when people are aware of them
• Can be beneficial in some contexts but harmful in others
Common Categories:
• Cognitive biases: Errors in thinking and memory
• Emotional biases: Influence of emotions on decisions
• Social biases: Impact of social context and others
• Motivational biases: Self-serving interpretations
# Systematic Biases Classification
systematic_biases = {
"cognitive_biases": {
"anchoring": "Over-reliance on first information",
"availability": "Judging by ease of recall",
"representativeness": "Judging by similarity to prototypes",
"confirmation": "Seeking confirming evidence"
},
"emotional_biases": {
&