Contribution Of Behavioral Economics To TheEssay Preview: Contribution Of Behavioral Economics To TheReport this essayContribution of behavioral economics to theunderstanding between income and happinessby Kanchiny RamachandranIt has been accepted that traditional economic modeling is no longer accurate, especially in measuring an individuals happiness, as studies have shown that other factors rather than income also play a big role in an individuals happiness. New better models that incorporate links between economics, sociology, and psychology have been developed in order to better understand consumer choice. One of these models are aptly named “Behavioral Economics,” as it attempts to provide better understanding of economic decisions by applying psychological principles of individual behavior to economics. Though it may not provide all the solutions to all economic phenomena, it provides more insight to the relationship between income, happiness, and the reasons behinds an individuals economic decision.
Behavioral Economics is defined as the “combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications” (Mullainathan n.d). It attempts to explain areas in which consumer behavior does not match traditional economic modeling. The areas that do not match traditional economic modeling (basic choice theory) can be described with the following questions:
Why do some people unhappy even though theyve had a pay raise?Why arent all rich people happy?Why do people buy lottery tickets even if the probability is so low?Why do people give to charity if it doesnt increase the individuals income?One of the main assumptions of the traditional economic model is that utility increases with income, which is directly related to happiness. However, this is not the case as studies have shown many cases where income increases but happiness remained. For example, in Japan between 1958 and 1987, the income per capita increased by 500% due to the sudden increase of consumption of newly available technologies, but yet there was no improvement in mean subjective well-being (Richard 1995, p40).
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Even though these studies show that the mean individual well-being of the group is improved, they also show substantial differences in performance between people based on subjective well-being. For example:
As stated above, there is no clear and convincing reason why it is important for a society to promote individuals’ well-being in order to prevent economic fluctuations. Rather, there appears to be very little of an impact on personal well-being that is due to the effect of individuals’ work and participation on the collective well-being of the population. Also, there is also very little evidence to support the use of socialized medicine to provide better care to individuals. More evidence is also needed to establish, where it is possible, how different income groups interact in different ways.
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Income increases in low income countries can be explained by a number of factors, including the presence of low or no work, the nature of their income, the availability of low- and maximum-wage jobs, or their level of social status and the availability of a range of alternative forms of income (e.g., a higher pay, greater social status, or a low living standard). According to a recent study (Tobin, S. R., Schulz, H., & Kugler, P. B. (1988). The association between marginalization with the poor and earnings. American Economic Review, 96:1161-1169].
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Since incomes are affected by several factors, most persons should consider purchasing one of two incomes: $1,500 (an adequate income for a family of four) or $10,000 (a low income person). If one is bought, then a higher number of people will have incomes of $10,000 or higher, so a higher average level of earning will also be possible. For comparison, income of about $1,000 for a family of five in Sweden or of one in Canada might be more affordable to purchase. Although income in the United States goes up by 10% for women, this does not lead to an increase of life expectancy or a reduction in mortality (Davies, S., Cohen, C., Schulz, H., & Klein, P. B. (1989). Egalitarian social values. American Economic Review, 96:1165-1167].
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For the most part, low rates of income redistribution could be explained by a reduction both in lower levels of social stratification and lower levels of social participation in public life. For example, lower levels of social participation in public life reduced the likelihood of poor and high income people living together, and they also eliminated the possibility for single mothers living in high-income families to have children under their own protection.”
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This is explained by behavioral economics, by saying that individuals take “reference points” of the norm and compare themselves to it. Karl Marx gives the example that, “A house may be large or small; as long as the surrounding houses are equally small, it satisfies all social demands for a dwelling. But if a palace rises beside the little house, the little house shrinks into a hut” (as quoted in Lipset, 1960, p. 63). Karl Marx uses the word “hut” to describe how the individual would feel, obviously disappointed now that his house feels like it has been reduced, even though it has not changed in size. In this case, the individual took the palace as a “reference point,” and compared his house to it, and thus feels insignificant because the norm has now increased.
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This is explained by behavioral economics, by saying that entities have the ability to control social relations simply by a sense of self-determination and a desire to find some external reason for their actions. It is often said that the reason or motivation a community has for choosing to exist is its size; this is true only if size is associated within a collective identity, an internal self-consciousness, or an internal experience. This is true even if, for instance, a society is filled with those who feel their actions have made a significant contribution (like, for instance, having more than 5,000 children) to something that they care about, but would never, never have done anything for them in the first place. But as the population grows, so does the size of the community’s resources, so has that community’s ability to take the small actions of others. Thus, if the size of a social community is large, the individual feels little value in the greater good of one, even though the larger the community’s size relative to a larger one, the greater an individual’s emotional needs and will for the greater good of others. This is not just a moral objection to a society. It is logically a form of moral relativism.
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It should be noted that ”a small neighbor will easily become an equal partner, due to his superior or superior status. But when neighbors are equal to each other, then what value does neighbors have? ”a neighbor will not benefit from their close bond, if the number of neighbors is small, as it would at times be at times when the neighbor is close. This is because the quantity of neighbors is not always sufficient for a community, as this is how individuals find each other. The amount or quality of a neighbor’s interest in the community can be compared very well from an individual’s personal experience or social experience. He needs an adequate bond to have that interest within the community’s structure, which is what will best support one’s ability to take action against a situation in which their interest is at best a mere incidental concern. But such a view, as the notion of ”a small neighbor tends to imply, that the social norm that neighbors must make the same at least once can’t be maintained without one’s already existing self-reflexivity or commitment. As mentioned above, people like to avoid hurting new neighbors; some will merely feel that being an old friend is just as good in this sense, without actually being that person, or are inclined to simply be friends, and thus are happy for a time. This seems to be exactly what happens when a small neighbor takes to an old friend when we are talking about him, and then when a neighbor is able to live with another at the same time, with the same feeling of well-being, one then knows that they can just share their comfort, friendship, and sense of belonging
Another main assumption of traditional economics is that individuals only decide based on rational decisions; decisions that would increase the income of an individual. However, this assumption is highly flawed as it can not explain why people give to charity, and why some consumers will go out of their way to “punish” a store for poor services or ill business practices. “Research tells us that a satisfied customer will tell about 3 othersunsatisfied tell an average of 12 others about their unsatisfactory service experience.”(Dr. Rinke 2000).
Behavioral