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  • Print publication year: 2016
  • Online publication date: May 2018

Book V - Behavioral economics: a challenge to conventional microeconomics

Summary

In the first thirteen chapters we have presented microeconomics as it is conventionally taught, with emphasis on the “economic way of thinking” and on applications focused on management decision making. In Chapter 14, we present key arguments of behavioral economists and psychologists who insist that conventional microeconomics is defective at its core, by assuming decisions are made “rationally.” We review many of the behaviorists’ research findings.

In Chapter 15, we explore problems with the conceptual approach and the findings of behavioral economics, which cause us to conclude that all methods of understanding complex human behavior (with the complexity multiplied in business) are necessarily defective, including both conventional microeconomics and behavioral economics. We are left with an unfortunate choice in how we undertake our study of economics, between two defective options. Different people can be expected to assess the merits of the two options differently. We suspect that as conventional microeconomics and behavioral economics advance over the coming decades, ways will be found to move between the two methodological approaches, taking advantage of the relevant merits of the different approaches when deemed productive. We expect economists in the two camps (who now seem to be at loggerheads, quick to criticize the approach of the other group) will seek to integrate aspects of the different approaches into what might be called a “unified field theory” in microeconomics. However, at this writing that seems to be a distant hope.At the moment, behavioral economists stress the various ways in which people are not as rational as conventional economists claim. Conventional economists can rightfully remind behavioral economists that the rationality premise is designed to facilitate analysis, and has never been intended to be a fully accurate description of people's thinking and decision making. Moreover, behavioral economics draws out ways in which students can become more rational in their thinking and decision making than they might naturally be, potentially increasing their own welfare and their firms’ profitability.