1. Introduction
In his famous article “A Behavioral Model of Rational Choice” from 1955, Herbert Simon already called the concept of the Homo Economicus into question and explained:
“The concept of “economic man” is in need of fairly drastic revision. […] The task is to replace the global rationality of economic man with a kind of rational behavior that is compatible with the access to information and the computational capacities that are actually possessed by organisms exist. One is tempted to turn to the literature of psychology for the answer.”
Table of Contents
1. Introduction
2. Behavioral Economics
2.1 History
2.2 Definition
2.3 Experimental Economics and Neuroeconomics
3. Neoclassical Economics
3.1 Advantages of the Standard Economic Model
3.2 Criticism
4. Behavioral Economic Model
4.1 Principle 1: People are influenced by Other’s Behavior
4.1.1 Herding
4.1.2 Social Proof
4.2 Principle 2: Habits are important
4.2.1 Status Quo Bias
4.3 Principle 3: People can act altruistically
4.3.1 The Ultimatum Game
4.4 Principle 4: People’s Self-Expectations influence Behavior
4.4.1 Cognitive Dissonance
4.5 Principle 5: People are loss-averse
4.5.1 Endowment-Effect
4.5.2 Sunk-Cost Effect
4.6 Principle 6: People are bad at Computation when making Decisions
4.6.1 Salience
4.6.2 Hyperbolic Discounting
4.6.3 Framing
4.6.4 Intuition
4.7 Principle 7: People need to feel involved and effective to make a Change
4.7.1 Illusion of Control
4.7.2 Hindsight Bias
4.8 Résumé
5. Conclusion
Research Objectives and Themes
This paper examines the limitations of the traditional Homo Economicus model by integrating insights from behavioral economics and psychology. It investigates how human cognitive biases and social factors challenge the assumption of perfect rationality in decision-making processes.
- Historical evolution of behavioral economics versus neoclassical theory.
- Key psychological principles influencing economic decision-making (e.g., loss aversion, habits, altruism).
- Analysis of cognitive biases such as herding, framing, and cognitive dissonance.
- Evaluation of the validity of the "rational man" construct in modern economic theory.
- The impact of interdisciplinary approaches on the future of economic research.
Excerpt from the Book
4.6.3 Framing
If individuals must make a decision between two actions, they are strongly influenced by how the two possible outcomes are presented to them. If one is dressed up as a loss, and the other as neutral or as a gain, then they will avoid the apparent loss – even when the two outcomes are mathematically identical.
The most famous and robust example of framing effects was illustrated by Tversky and Kahnemans’ Asian disease problem.
Problem 1: Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows.
Program A: If Program A is adopted, 200 people will be saved [72%].
Program B: If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved [28%].
Which of the two programs would you favor?
Summary of Chapters
1. Introduction: This chapter highlights Herbert Simon’s early critique of the Homo Economicus concept and introduces the interdisciplinary shift towards behavioral and experimental economics.
2. Behavioral Economics: This section provides a historical overview of the development of behavioral economics and defines it as a synthesis of psychology and economics.
3. Neoclassical Economics: The chapter outlines the foundations of the standard economic model, its focus on rationality, and the common criticisms raised by behavioral economists.
4. Behavioral Economic Model: This main chapter details seven key principles that explain deviations from rational choice, including social influence, habits, altruism, and various cognitive biases.
5. Conclusion: The concluding chapter summarizes how behavioral economics enhances our understanding of human behavior and discusses the uncertain future of the Homo Economicus model.
Keywords
Behavioral Economics, Neoclassical Economics, Homo Economicus, Rational Choice, Cognitive Bias, Prospect Theory, Loss Aversion, Framing, Bounded Rationality, Altruism, Herding, Neuroeconomics, Mental Accounting, Decision Making.
Frequently Asked Questions
What is the primary focus of this work?
The work focuses on challenging the traditional neoclassical assumption of the "Homo Economicus"—the perfectly rational decision-maker—by introducing psychological insights that explain human behavior more accurately.
What are the central thematic areas discussed?
The text explores seven key principles including social influence, habit formation, altruism, self-expectations, loss aversion, computational errors, and the human need for effectiveness.
What is the research question addressed in this paper?
The paper evaluates whether the "Homo Economicus" model is becoming obsolete in light of modern behavioral and experimental economic findings.
Which methodologies are employed in the study?
The study utilizes a theoretical literature review, contrasting neoclassical models with behavioral theories and empirical findings from experimental economics and psychology.
What does the main body of the work cover?
The main body systematically analyzes seven principles of behavioral economics, supporting each with definitions, examples, and experimental results such as the Ultimatum Game or Asian disease problem.
Which key terms summarize the essence of this research?
Essential keywords include Bounded Rationality, Cognitive Bias, Loss Aversion, Framing, and Behavioral Economics.
How do "Sunk Costs" affect consumer behavior according to the author?
The author explains that consumers often irrationally account for past expenses to avoid feeling a loss, leading them to take unnecessary steps to ensure a previous investment was not made in vain.
What is meant by the "Illusion of Control"?
The "Illusion of Control" is the psychological tendency to believe one can influence outcomes that are actually determined by chance, often observed in gambling or specific "skill cue" situations.
- Quote paper
- Jessica Witzel (Author), 2012, Is Homo Economicus becoming extinct?, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/195282
