Behavioral Economics

The complexity of a problem, the lack of information and time or the uniqueness of a situation causes that people do not act optimally. Although a person is motivated to decide effectively – which especially applies to markets – it often shows a limited power of will, insufficient consideration and incompleteness of one’s own interest. “All of these forms of “irrationality” play important roles in the lives of every one of us, but I think it is misleading to call them “irrationality.” They are better viewed as forms of bounded rationality,” claimed Herbert A. Simon. By thus he defined the subject of behavioral economics: “To understand and predict human behavior, we have to deal with the realities of human rationality, that is, with bounded rationality. There is nothing obvious about these boundaries; there is no way to predict, a priori, just where they lie.” (H. Simon: Human Nature in Politics, 1985).

Behavioral economic research on human decision-making also emphasizes the strong influence of emotions – moral feelings, fear, expectations, trust, envy, aversion, sympathy and anger – and intuition on human decision-making. Behavioral economists have already identified both rational behavior and behavioral patterns which show limited human skills to reach a desired goal in a vast variety of phenomena such as saving, health service, investing on the stock market, the behavior of both employees and employers on theemployment market or the behavior of voters and politicians in the a public election.

It is a historical irony that this almost rediscovers the work of Adam Smith, written 17 years before the Wealth of Nations which laid the foundations of classical economics. In his “The theory of moral sentiments” (1759, Czech 2005), Smith states: “There are some situations which bear so hard upon human nature, that the greatest degree of self-government, which can belong to so imperfect a creature as man, is not able to stifle, altogether, the voice of human weakness, or reduce the violence of the passions to that pitch of moderation, in which the impartial spectator can entirely enter into them.”

It is no coincidence that the 2002 Nobel Price was awarded for the development of both experimental and behavioral economics (to Vernon Smith, and Daniel Kahneman). While experimental economics is a method or a tool, behavioral economics – which uses this tool very often – is more of a general approach or a school of thinking. It tries to involve human behavior in a more realistic and detailed way. Therefore, apart from “clearly” economic hypotheses, it also uses pieces of knowledge from other sciences about human beings: especially psychology, but also sociology, anthropology or neurosciences (its sub discipline “neuroeconomics” tries to formulate a biological model of decision-making in an economical environment). More precise model images of behavior and human thinking, of the stage and dynamics of human societies, companies and whole economies are created this way.