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The-Evolution-of-Behavioral-Economics (1).pptx
- 1. The Evolution ofBehavioral Economics From our primal origins to modern day society, we've been fascinated with decision- making. Join us as we explore the history of Behavioral Economics. Dr Palak Jain Jagran Lake city University
- 2. Understanding Behavioral Economics 1What is it? Behavioral Economics is the science of understanding how people make decisions. It's a multidisciplinary field that combines economics, psychology, and neuroscience. 2 Why is it important? It's crucial to recognize that people often make irrational decisions and that traditional economic models have limitations. Behavioral Economics allows us to gain deeper insights into human decision-making.
- 4. Introduction to Behavioral Economics:Historical Context 1 The Rise of Behavioral Economics Learn how traditional economic theories were challenged by the emergence of Behavioral Economics. 2 Understanding Human Behavior Discover the shift in focus from rational decision-making to the study of human biases and cognitive processes. 3 Applications in Real-World Scenarios Explore how Behavioral Economics has revolutionized fields like finance, marketing, and public policy. 4 Impact of Technological Advancements See how Behavioral Economics intersects with cutting-edge technologies like AI in shaping our behavior and choices.
- 5. Major Historical Events GreatDepression The economic and financial devastation of the Great Depression exposed the limits of traditional economic models and opened the door for alternative approaches to economics. Manhattan Project The project relied on expert opinion and quantitative analysis, furthering the idea that traditional economic models could be supplemented by psychology and decision-science research. Baby Boomers The post-war generation's emergence shaped society and its preferences, influencing decision- making and the field of Behavioral Economics as we know it today. 9/11 The terrorist attacks on September 11, 2001 shook the world and demonstrated how irrational decisions can be made in times of crisis.
- 6. Principle 1: Otherpeople’s behavior matters Principle 2: Habits are important Principle 3: People are motivated to ‘do the right thing’ Principle 4: People’s self-expectations influence how they behave Principle 5: People are loss-averse Principle 6: People are bad at computation Principle 7: People need to feel involved and effective to make a change Seven Principles for Policy-Makers
- 7. Key Figures andContributions 1 Daniel Kahneman & Amos Tversky Discovered heuristics and cognitive biases, helping us understand why people make irrational decisions. 2 Richard Thaler Developed the concept of behavioral finance, which explains how emotions and cognitive errors influence financial decision-making. 3 Herbert Simon Introduced the concept of bounded rationality, which suggests that people make rational, yet limited, decisions based on the information available to them.
- 8. Key Historical EventsLeading to the Development of Behavioral Economics 1 The Prospect Theory 1950s - Prospect Theory challenges the long-standing assumption of rational decision-making, introducing the concept of human biases. 2 Cognitive Biases and Heuristics 1970s - The research of Kahneman and Tversky sheds light on the systematic cognitive biases that affect our decision-making processes. 3 The Nudge Theory 2000s - Thaler and Sunstein's concept of nudges highlights the power of subtle interventions in shaping behavior without restricting choice.
- 9. Pivotal Research andExperiments The Ultimatum Game This game demonstrates how people are willing to sacrifice some material gains to achieve a sense of fairness. It was pioneered by Werner Güth in 1982 and has been used widely in experiments ever since. The Endowment Effect Discovered by Thaler, it shows that people value an object more if they own it, rather than if they don't. This insight helps explain why people are often reluctant to give up possessions even if there is a financial incentive to do so. Uncover the cognitive bias that shows how our decisions are heavily influenced by initial reference points, or anchors. Anchoring Effect
- 10. Discovered by Kahnemanand Tversky, this theory shows people are more likely to act to avoid losses than they are to achieve gains. Prospect Theory This research shows how expectations performance. When people are told they are expected to perform well, they tend to rise to meet the challenge. The Pygmalion Effect
- 11. Examples from theReal World and AI Finance • Behavioral biases in investment decisions • Impact of social pressure on spending habits • Use of personalized algorithms for financial advice Marketing • Nudges and persuasive techniques in advertising • Influence of priming and framing on consumer behavior • Utilizing AI for personalized marketing strategies Public Policy • Designing effective behavior change interventions • Behavioral insights in promoting health and sustainability • Implementation of AI- powered policy simulations
- 14. Conclusion and KeyTakeaways Importance of the Historical Context The historical context provides insight into the origins of Behavioral Economics and the reasons for its evolution. Understanding this context can aid in the application of these principles in modern decision-making. Summary of Major Events, Figures, Research, and Experiments Detailing the key figures, research, and experiments allows for a comprehensive understanding of the field of Behavioral Economics. These provide valuable insights into better decision-making, and help explain the real-world phenomenon we encounter every day.
- 15. Advancements in Behavioral Economics Thefield of Behavioral Economics continues to make strides in understanding decision-making processes. Continuing research in heuristics, cognitive biases, and moral dilemmas will continue to shape the field.
- 16. Question 1: (2marks) Define bounded rationality in the context of Behavioral Economics and explain its significance in economic decision-making. Question 2: (2 marks) Highlight two cognitive biases discussed in Behavioral Economics and elucidate how they influence economic choices. Question 3: (3 marks) Explain the impact of bounded rationality on economic models. Provide two examples of how integrating psychological insights has enhanced the understanding of economic behavior. Question 4: (3 marks) Compare and contrast traditional economic assumptions of rational decision-making with the principles of bounded rationality introduced by Behavioral Economics. Discuss the implications of this shift in economic analysis.
- 19. Impact of TechnologicalAdvancements