The economy is driven by “emotions”

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What is behavioral economics?

Behavioral economics will be the field of economics concerning when human behavior deviates from the assumptions of economic theory. While traditional economics assumes that people make rational decisions and seek to maximize their own self-interest, in reality people behave in more complex and unpredictable ways. Behavioral economics aims to improve the design of markets and policies and enhance social welfare by understanding how people behave.

Behavioral economics is an interdisciplinary field that combines the disciplines of psychology, sociology, behavioral science, and economics. Typical areas of research include prospect theory, framing effects, loss aversion tendencies, temporal preferences, choice abundance, and the influence of social norms.

Behavioral economics is used by businesses, government agencies, and nonprofit organizations to develop more effective strategies and policies; for example, policies may be designed to promote savings, taking into account free will bias and delayed discount rate issues. It has also been applied to examine business strategies, such as improving product pricing and advertising strategies. Here we discuss behavioral economics based on “Behavioral Economics: The Economy is Driven by ‘Emotions‘”.

The economy is driven by “emotions”

Traditional economics is built on the premise that people act rationally in order to maximize their economic and material utility. Behavioral economics, on the other hand, is based on the premise that actual human behavior is often more ambiguous and irrational.

The irrational decision criteria here are the movements of the mind, such as emotions and intuition. The mind here refers to perception, cognition, memory, judgment, decision making, emotions, intentions, and motivations, etc. Behavioral economics adds a psychological approach to economics, targeting individuals, in order to determine how people think and act.

In this book, I define the trend from existing rational economics to behavioral economics, which is influenced by the mind, as a shift from “account to emotion. Behavioral economics mathematically expresses such a model that includes people’s emotions. There are several theories of behavioral economics, and in this book, “heuristics and biases,” “anchoring,” “framing effects,” and “prospect theory” are described.

The first direct application of behavioral psychology is in marketing and business as a means of predicting individual behavior patterns. Models of loss aversion based on prospect theory and the construction of business models based on the Thanksgiving effect and the anchoring effect have been widely used in recent years.

The idea of using computers to simulate behavioral psychology has been around for a long time. For example, psychohistory in Asimov’s Foundation series, and in many recent TV dramas.

In addition, the probability models (e.g., Bayesian models) and value function models (e.g., sigmoid functions) that form the basis of these models are useful from the perspective of machine learning, and I think they may also be useful for modeling search and recommendation systems. In the future, I would like to discuss each of these theories a little at a time.