23 Jul Behavioral Economics
Behavioral economics is a strand of heterodox economics—-combining psychology and economics. In the conventional economic model, people act as rational agents in decision-making. The fundamental tenets of economic rationality (tendency to equilibrium, exogenous shocks, individual rationality, and systemic consistency) are challenged by behavioral economists because people act as humans—-thinking automatically—-rather than economic actors or econs—-thinking reflectively (Silim, 2017; Thaler and Sunstein, 2008). At the basis of behavioral economics are two cognitive systems or modes of thinking (System I and System II) (Kahneman and Tversky, 1983; Kahneman, 2011). System I thinking is automatic, fast/rapid/quick, intuitive, instinctive, gut reaction, little or no effort, uncontrolled, unconscious, skilled and associative thinking (Tversky and Kahneman, 1974). Conversely, System II thinking is reflective, slow, rational, self-conscious, conscious thought, deliberate and effortful mental activity, controlled, self-aware, rule-following, deductive or inductive thinking (Thaler and Sunstein, 2008). Instead of pure rationality, human behavior is ‘bounded’ by three traits: rationality (bounded due to constraints in our capacity to think, available information and time), willpower (people take actions that they know to be in conflict with their long-term interests) and self-interest (people are often willing to sacrifice their own self-interest to help others). (Mullainathan and Thaler, 2000).
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