ECON 202 Research Paper: Behavioral Economics
Chapter 8 of the text provided the student with some general themes and ideas that have been developed by the behavioral school of economics. For this paper, the student should take that information as a base of knowledge and expand upon it by researching(at least 5 additional resources) the origins and evolution of the behavioralists. Some of the main items that you should fully address in the paper include:
Leading figures in the school of thought and their hypotheses, theories, works and awards (particularly the nobel prize).
Discussion of divergences from neo-classical theory
Framing and advertising
The endowment effect
Implications for business strategy and public policy under neo-classical and behavioralist assumptions(which would require more regulatory involvement?).
Behavioral Economics Assignment
Behavioral economics combines several principles of economics and the principles of psychology in understanding people's behavior when they are making economic decisions. It is an emerging discipline that looks at several behavioral science and economics concepts and delves deeper into actions, reactions, and people's feelings when faced with decisions, scarce resources, and choices (Reed et al., 2013). It enables people to fully understand why some people make rash decisions and others make well-thought-out decisions.
Leading Figures in Behavioral Economics
Some of these include Herbert Simon, Daniel Kahneman, and George Arkelof.
Herbert Simon was an American political scientist and economist well known for his economics theory of bounded rationality. In the bounded rationality theory, Herbert said that the ability of human beings to make decisions is hampered by the limitations that could be out of their control. The way people prefer several things depends entirely on a given set of reference levels. Herbert was born in 1916 and passed on in 2001 (Simon, 2020). Other works include the theories of satisfying and the fact that human beings cannot take advantage of all the factors in the cost-benefit analysis. In 1978, Herbert received the Nobel Peace Prize for economics. He also received the Turing award in 1975.
Daniel Kahneman is an Israeli American economist and psychologist. Previously, he was a professor of Psychology at Princeton University. In October 2002, Daniel was awarded a Nobel Memorial Peace Prize for his outstanding and groundbreaking work on applying deep psychological insights in economics (Smith, 2002). Specifically, he proposed several theories in the elements of decision-making under the states of uncertainty. Some of the hypotheses are that most people do not appreciate and do not analyze the whole situation in their decision-making. He postulated that the rule of the thumb is widely used in making decisions rather than the decision-making process through rational means.
George Arkelof is a university professor from the University of Georgetown in the United States of America. He has come up with groundbreaking research regarding several economics principles that draw theories from other disciplines. These disciplines include psychology, management, and sociology (Georgetown.edu, n.d.). He came up with the ''Market for lemons" hypothesis. The hypothesis looks into the effects of asymmetric information in making the market appear to be pervasive. Ideally, his economic theories focus on the importance of communication in decision-making. Alongside Michael and Joseph, he was awarded the Nobel Peace Prize for Economics Science in 2001.
The endowment effect
The concept of the endowment effect is alive in behavioral economics and behavioral finance, where there is irrational decision-making. In the endowment effect, people would instead place a high value on the items they own than those they do not own, and often, this goes against the market value of those items(Ganti, 2019). The endowment effect examples occur in the instance of wine when people would prefer to keep a bottle of wine and avoid selling the same at the current market price due to the thoughts, feelings, and perceptions that this bottle of wine is worth a little bit more than the current market price. The endowment effect has an issue on the valuation of the stocks that people have inherited from relatives, and it also increases the loss aversion of people.
In this pricing methodology, a product is perceived to be cheaper deliberately. The marketers make this product to be viewed or become more affordable compared to another product that is placed alongside it. The consumers will use the first product as a reference point when exposed to the second product. Anchor pricing is, therefore, a strategy that impacts the willingness of the consumer to purchase certain goods (Simonson & Drolet, 2004). Anchor pricing is done by organizations willing to maximize the price perception (PriceBeam, 2019). Consumers will choose a highly or slightly priced commodity or service because they expect that the commodity will offer them somewhat better service than what they are receiving if they choose a commodity that seemingly appears cheaper.
Ganti, A. (2019). Endowment Effect Definition. Investopedia. https://www.investopedia.com/terms/e/endowment-effect.asp
Georgetown.edu. (n.d.). Georgetown University Faculty Directory. Gufaculty360.Georgetown.edu. Retrieved February 11, 2022, from https://gufaculty360.georgetown.edu/s/contact/00336000014Su4DAAS/george-akerlof
PriceBeam. (2019). Anchor pricing. Blog.pricebeam.com. https://blog.pricebeam.com/pricebeams-explanation-of-an-anchor-price
Reed, D. D., Niileksela, C. R., & Kaplan, B. A. (2013). Behavioral Economics. Behavior Analysis in Practice, 6(1), 34–54. https://doi.org/10.1007/bf03391790
Simon, H. (2020). The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1978. NobelPrize.org. https://www.nobelprize.org/prizes/economic-sciences/1978/simon/biographical/
Simonson, I., & Drolet, A. (2004). Anchoring effects on consumers’ willingness‐to‐pay and willingness‐to‐accept. Journal of Consumer Research, 31(3), 681–690. https://doi.org/10.1086/425103
Smith, D. (2002). Psychologist wins Nobel Prize. Https://Www.apa.org. https://www.apa.org/monitor/dec02/nobel.html