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Table of Contents Table of Contents 1 Introduction 2 Outline of the standard model of individual economic behaviour 2 Assumptions 3 Economic Rationality 3 People have known Preferences 3 People Make Decisions Based on Full Information 4 Strengths 4 Weaknesses 4 Application of the standard model of individual economic behaviour 5 Case1: Monkeys have ‘Irrational’ Aversions to Risk Just Like Humans 5 Case 2: Money Illusion 5 Case 3: Altruism, the Joy of Giving 5 Conclusion 6 References 7 The Standard Model of Human Behaviour in Economics Introduction Economics is a broad area of study as it involves the study of human behaviour that entail the distribution of scarce resources…
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Download file to see previous pages The main goal of these economic theories is to describe and give explanation to relations between economic phenomena. In order to achieve this, the theories are based on a number of assumptions (Baddeley, 2013:56). This explains why the concept of behavioural economics is important as it gives more explanatory power to the economic theory by giving it realistic psychological basis (Wilkinson and Klaes, 2012:1). This goes ahead to prove that behavioural economics seeks to augment the standard model of analysis, not to replace it. The standard model discussed in this paper is used to critique and understand behavioural economics. Outline of the standard model of individual economic behaviour The standard model in economic behaviour is also commonly referred to as the neo- classical model. It is a well established model in the subject of consumer choice and consumer welfare. The standard framework in behavioural economics is basically a decision making model that is normative and descriptive in nature. Additionally, it associates the concept of self interest with maximising utility. This is owing to the fact that the model accurately defines how people behave and gives advice on how they should behave to attain specific goals and objectives. Assumptions Economic Rationality This assumption is based on the fact that acts rational so as to maximise utility. Economic actors face complex situations and a rational decision model describes how most people would act in such situations (Kahneman, 2011:86). The simple model of economic rationality is only applicable to uncertain decisions hence the outcomes are unambiguously related to the actions (Wilkinson and Klaes, 2012:5). This is the most important assumption in the model in fact, the model is referred to as the economic model of rationality. Rationality is a broad term that refers to the everyday reasoning. This interpretation is too complex in the economics context. To explain this assumption further, consumers derive satisfaction or benefits from a particular activity. This is what is commonly referred to as utility in the field of economics. The standard model explains the benefits associated with consuming a good based on monetary value and other benefits including satisfaction. People have known Preferences This explains why the concept of consumer preferences was introduced the simple model of economic rationality is only applicable to uncertain decisions hence the outcomes are unambiguously related to the actions (Wilkinson and Klaes, 2012:6). In this context, individuals are assumed to weigh between different preferences and choose one that gives the preferred outcome (Thaler and Sunstein, 2008:379). There are two assumptions concerning the nature of consumer preferences. First, there is completeness that states that consumers consider an ordering across all the alternatives. Secondly, individuals are assumed to make rational choices. People Make Decisions Based on Full Information The standard model assumes that individuals are able to perfectly evaluate their own ...Download file to see next pagesRead More
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