Effects of Behavioral Economics in the Free Market - Assignment Example

There is a more thoughtful and relevant platform for designing economic policies since it takes psychological thinking into consideration. Effects of behavioral economics in the free market. It relaxes rational thinking assumptions and therefore allows for argument in predicting how economic decisions can be guided. According to Barberis N.K (2001), behavioral economics can be used to predict and explain field phenomena such as anomalies in the stock market.

Behavioral economics borrows from the Proverb; a bird in the hand is worth two in the bush. It argues that consumers will prefer to hold what is already in their hands over what is far from them even if it costs less. They try to avert losses that may occur when they decide to seek high returns. It also tends to explain the case of Giffen goods whose demand increases with an increase in price. So in this case of mp3 and the digital camera consumer will be less rational by considering the second option even if the opportunity cost as well as other costs is the same. They will be guided by their behavior and human thinking. Read More