Behavioral Economics

Behavioral Economics explains the involvement of various human behavioral variables and psychological variables in economic decision making. Behavioral economics critics have over the years criticized the issue of the rationality of market participants. The critics claim that the existence of completion and learning opportunities have a significant influence on the rational behavior of the economic agents and therefore market situations are not the main influencing factor.

Other critics contend that behavioral models and cognitive theories, for instance, prospect theory, do not analyze economic behavior but rather decision-making. Moreover, they claim that these models present a once-off decision in the resolution of the problem at hand. The lack of a consistent and unifying behavioral theory amongst the behavioral economists has been reduced to mere unrelated and loosely related observations.

The traditional economist heavily criticizes the survey-based and experimental techniques, which are extensively used by behavioral economists to explain their concepts. In the determination of economic value, the economist heavily relies on the revealed preferences and not the stated preferences in the surveys. Moreover, surveys and experiments are prone to risks such as; systemic biases, incentive compatibility, and strategic behavior.

Response to the Criticism

In response to the criticisms, the behavioral economists have stressed on the application of the field studies instead of lab experiments. They further argue that neoclassical models have time and again failed to explain the economic outcomes by applying the real world contexts. The behavioral models have not only revised these traditional models but have also succeeded in making correct predictions where the traditional ones have failed.

Behavioral economics integrates the biological point of view in explaining the behavior of market participants. Biologically, all humans have same reaction in the face of stress and crises – qualitative and quantitative behavior change. How the economic agents react in situations of market stress and crises determines the outcome of the markets.