Behavioural Economics

Behavioural economics is essentially a combination of economics and psychology. It supplements mainstream economics with a realistic psychological foundation. Behavioural economics is said to augment the explanatory power of economic theory. It is believed to generate the following positive externalities for mainstream economic theory.

• Generate added theoretical insights
• Make better predictions
• Suggest better policy measures

An important point to be noted is that behavioural economics does not summarily reject the neoclassical approach towards economics. (Neoclassical economic theory depends on concepts of utility maximization, efficiency and equilibrium).

Characteristics Of Behavioural Economics

Behavioural economics methods are markedly different from those prevalent in other areas of economic theory. In its initial days behavioral economics heavily relied on evidence gathered from experiments. Gradually behavioural economists have ventured beyond experimentation and adopted the entire range of methods applied by economists in general. In spite of its dependence on experimental data behavioural economics is an entirely different concept from the discipline of experimental economics. Behavioural economists are often denoted as ‘methodological eclectics’. Their prime point of difference with others lies on the psychological insights they bring to economic theory (and not onset of research methods applied by them). Experimental economists, on the other hand, differentiate themselves by their use and endorsement of experimentation as research tools.

Recent Theories In Behavioural Economics 

Advancement in behavioural economics has brought it to such a level where it can effortlessly provide a parallel framework of economic analysis.

Some behavioural economic theory models sourced from recent research are mentioned below.

• Reference-dependent preference theory and preference ‘construction’ theories, which can suitably substitute utility maximization theory
• Prospect theory, which can replace standard ‘expected utility theory’
• Non-additive probability theories, which can substitute subjective expected utility theory
• Hyperbolic discounting, which can stand in for discounted utility theory
• Support theory, which can replace Bayesian updating
• Social preference theories, which can substitute standard self-interest theories
• Adaptive learning theories, which can stand in as a good approximation of equilibrium behaviour

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