Economic behavior is more complex than assumed by conventional economic theory. Political economy explains the functioning of government. Behavioral economics ties psychology into human behavior.
Economists assume that individuals make rational decisions. However real people are more complex.
Based on what you have learned in your assigned reading, answer the following questions in your initial post:
What are the human behaviors economists should observe when creating economic models? Example: people tend to find solutions that are good enough, but not the best solutions.
In your responses, comment on at least two of your peers’ posts and share example of how non-rational human behavior can change an economic outcome.
1 peer)When economists create economic models, they must bear in mind that consumers do not always make optimal decisions. Some are uninformed, others are content with “good enough,” and at times choices are made impulsively or emotionally. People frequently tend to overestimate their ability to make informed decisions, which can lead to poor decision-making and unnecessary risk-taking. This is known as the overconfidence bias. Individuals often struggle to change their minds and this unconscious mental process affects how they make choices. Some people believe that recommendations from others are more trustworthy than marketing and advertising. While word of mouth can create trust and satisfaction for a company, relying too much on a small group of reviews can limit your understanding of a product. It’s important to remember that not everyone will be completely satisfied all the time.
Mankiw, N. G. (2021). Principles o
peer 2)When creating economic models, human behavior has to be one of the biggest issues factored into the equation. Some examples tend to be overvaluation of resources, our outright resistance to change(even in the smallest amounts) and our tendency towards arrogance. The last 2 can be the biggest hinderances in the process given that we tend to think we know all there is to know already so are not willing to consider ideas from other points of view. If that is the case, we can definitely be lured into the trap of thinking all is well and never consider that our processes might not be perfect. I see this example all the time in my field. A company has processes set, but are not willing to consider that a change or another idea entirely might work better.
If we are more willing to be open to the ideas of others, only then can things change for the better in most cases.
