Author: Vsevolod Klivak
The rational choice and understanding of customer behaviour were and are quite important topics for economists to comprehend. In the Neoclassical approach, scientists use the “homo economicus approach”, which means, that every decision, which an economic actor would make has to be about maximisation or minimisation. Thus they have an assumption, that best decision shall be made or at least close to one. Is it really the truth? Probably not quite. The human being does not machine, there are more than only efficiency numbers, which people use for making the decision. Therefore Behavioural economics with more psychological approach may give a better understanding of decision making in the economy frame. The field of study known as behavioural economics initially began as a purely academic attempt at modelling irrational consumer choices, thereby challenging the notion of the rational consumer of traditional economics.
Applications
Nudge is a concept in behavioural science, political Theory and economics which proposes positive reinforcement and indirect suggestions as for ways to influence the behaviour and decision making of groups or enforcement. Nudging stands out from different approaches to accomplish consistency, for example, training, enactment or requirement. The idea has affected numerous lawmakers over the world. Several nudge units exist around the world at the national level as well as at the international level (OECD, World Bank, UN).
But there are some concerns about the theory. Tammy Boyce, from public health foundation The King's Fund, has said: "We need to move away from short-term, politically motivated initiatives such as the 'nudging people' idea, which is not based on any good evidence and doesn't help people make long-term behaviour changes." Another critique comes from Hausman & Welch. They have inquired whether nudging should be permissible on grounds of distributive justice; Lepenies & Malecka have questioned whether nudges are compatible with the rule of law. Essentially, lawful researchers have talked about the role of the nudges and the law. Behavioural economists such as Bob Sugden have pointed out that the underlying normative benchmark of nudging is still homo economics, despite the proponents' claim to the contrary.
Behavioural game theory, invented by Colin Camerer, analyses interactive strategic decisions and behaviour using the methods of game theory, experimental economics, and experimental psychology. Experiments incorporate testing deviations from common disentanglements of monetary hypothesis, for example, the autonomy maxim and disregard of charitableness, decency, and surrounding impacts. On the positive side, the technique has been connected to intelligent learning and social inclinations. As an examination program, the subject is an advancement of the most recent three decades.
The central issue in behavioural finance is explaining why market participants make irrational systematic errors contrary to the assumption of rational market participants. Such errors affect prices and returns, creating market inefficiencies. The study of behavioural finance also investigates how other participants take advantage (arbitrage) of such errors and market inefficiencies. Within behavioural finance, it is assumed the information structure and the characteristics of market participants systematically influence individuals' investment decisions as well as market outcomes.
Behavioural finance highlights inefficiencies, such as under- or over-reactions to information, as causes of market trends and, in extreme cases, of bubbles and crashes. Such reactions have been attributed to limited investor attention, overconfidence, overoptimism, mimicry (herding instinct) and noise trading. Technical analysts consider behavioural finance to be behavioural economics' "academic cousin" and the theoretical basis for technical analysis.
There is the opposite approach. The efficient-market hypothesis was developed by Eugene Fama who argued that stocks always trade at their fair value, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by chance or by purchasing riskier investments. His 2012 study with Kenneth French supported this view, showing that the distribution of abnormal returns of US mutual funds is very similar to what would be expected if no fund managers had any skill—a necessary condition for the EMH to hold. The efficient-market hypothesis (EMH) is a theory in financial economics that states that asset prices fully reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information.
Conclusion
Behavioural economics is undoubtedly a fresh way to address essential economics issues. Although I have mentioned the best sides of the theory, there are some aspects, which are not so robust. First of all theory itself is best described as science between psychology and economic theory, therefore it may be some bad products of its fusion, like basic concerns about psychology. Measurement and estimation are not feasible enough. Products of the BE are mostly prognoses or suggestions, which are based on the experiments or theory of actions. Also worth mentioning, that on a macro level “homo economicus” approach are more common, thus BE is more descriptive for micro level, but still there are plenty applications of BE, which I haven’t mention. Works of Thaler and Kahneman have shaped the modern path of economic decision making, but still, there is a space for further studies.
Literature:
1) https://en.wikipedia.org/wiki/Behavioral_economics
2) https://www.investopedia.com/terms/b/behavioraleconomics.asp
3) https://www.behavioraleconomics.com/resources/introduction-behavioral-economics/
4) https://www.theguardian.com/world/2017/oct/09/what-is-behavioural-economics-richard-thaler-nobel-prize
5) https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3680155/
6) https://www.investopedia.com/terms/b/behavioralfinance.asp
