The Need And Relevance of Behavioral EconomicsDecember 20, 2022 2022-12-20 11:31
The Need And Relevance of Behavioral Economics
Like every other social science subject, economics also aims toward the world we live in. There is a relationship between human behaviour and economics. The phenomena of economics related to human behaviour including optimal utilization of resources are called behavioural economics.
Behavioural economics focuses on people’s economic decision-making and its consequences on different aspects of the economy. like returns, resource allocation, market prices, and market forces. It combines and relates the elements of economics and human psychology to understand human behaviour. There are basic assumptions that are taken into consideration in it. One, people have neither efficient utility maximisation nor it is their goal. Second, people are capable of making rational decisions from the options available to them. It mainly focuses on activities and decisions regarding the daily course of consumption and other activities in their lives.
Behavioural economics was introduced in the 20th century with aspects of neuroscience and psychology. Economist Gary S. Becker introduced this in his book Economic approach to human behaviour’ in 1976 which has the theory of rational choice. Behavioural economics is considered to be a modern theory that is totally different from the traditional theory of decision-making. It states that most people make irrational decisions because they are emotional and do not have self-control or limited self-control. It also considers other factors like biases, loss aversion, bounded rationality and situational framing, etc. All the factors of the human-like special, emotional, etc. are studied in this branch of economics.
Need for behavioural economics
We need behavioural economics to understand the daily life decisions of customers and anyone else. It is used in the health sector, insurance sector, corporates, multi-national companies etc. In all sectors, it has a significant role to play. Companies are inhabiting behavioural economics to rising their sales. Companies study their customers and make decisions about their business accordingly. Especially, marketing personnel use behavioural economics to conduct competitive market research and marketing strategy. It also helps to understand the customers of competitors which helps any corporate to sustain itself for a longer time. Because of behavioural economics companies tends to understand today that consumer is not rational. Businesses make decision-making policies are now incorporated with the elements and theories of behavioural economics.
Relevance of behavioural economics
Behavioural economics has gained importance in almost all sectors of the economy. It gives initiative for innovation as behavioural game theory helps to run experiments on the irrational decision-making of people. As it is noted earlier, people make rash decisions which also applies to the field of capital markets trading. To analyse, behavioural economics is used and proved to be useful. Using behavioural economics different trading courses are launched in the markets according to the need of various kinds of traders. Not only the corporates, but the government also uses behavioural economics theories and models to formulate various policies in a more effective way and this also helps them to understand the cause of specific actions taken by the economic agents for a specific decision or policy of the government. Behavioural economics raises the explanatory power of economics by providing a more realistic psychological formulation.
Models of behavioural economics represent better modification refining of the standard model into explanatory and predictor using empirical implications derived from observed and experimented studies. It also merits future research and challenges. The approach of behavioural economics toward rational choice and equilibrium models only adds to the framework of analysis rather than replacing or abandoning them.
Today, in this fast-paced world, behavioural economics becomes essential in every sector of all the economies around the globe to perform and analyze decisions making of business and human lives. Behavioural economics has importance when any theory proved inaccurate with its empirical implication indicating that we should question those implicit assumptions that were assumed in the theory given.