Behavioral economics

behavioral economics and behavioral finance (also called behavioral economics and behavioral finance) are Nearby fields that apply scientific research into human and social cognitive and emotional trends for a better understanding of economic decision making and analysis of how they affect market prices, profits, and resource allocation. The fields of study are mainly referred to rationality or its absence, in what refers to economic agents. Behavior models generally integrate insights from psychology with neoclassical economic theory. Lately, neuroscience has joined this alliance, which has made it possible to study the neuroanatomical and neurophysiological bases of economic behavior, thus forming the new science of neuroeconomics.^{[citation required]}

The analyzes refer mainly to the effects of market decisions, but also to public choice, another source of economic decisions with some similar trends. In recent years, the academic knowledge generated by the field of behavioral economics has had a considerable impact on the way in which companies design marketing strategies, products, experiences and customer approach, this as a consequence of the unification between behavioral theory and business practice.^{[citation needed]}

History

In classical economics, economic theory had a close relationship with psychology. For example, Adam Smith wrote an important text describing the psychological principles of individual behavior: The Theory of Moral Sentiments. For his part, Jeremy Bentham wrote extensively on the fundamentals of utility.

Economists began to distance themselves from psychology during the development of neoclassical economics, as they sought to redefine the discipline as a natural science, with explanations of economic behavior deduced from assumptions about the nature of economic agents. The concept of homo economicus was developed, and the psychology of this entity was fundamentally rational. However, psychological explanations continued to appear in the analysis of many important figures in the development of neoclassical economics, such as Francis Edgeworth, Vilfredo Pareto, Irving Fisher, and John Maynard Keynes.

Psychology had long since disappeared from economic discussions by the middle of the XX century. Several factors contributed to the revival of its use shortly thereafter and to the development of behavioral economics (see: The Issue of Economic Rationality). The models on expected utility and discounted utility began to gain wide acceptance, by generating verifiable hypotheses about decision making under uncertainty, and about intertemporal consumption, respectively. A number of observed and reproducible anomalies challenged these hypotheses. Furthermore, during the 1960s, cognitive psychology began to describe the brain as an information processing device (in contrast to behavioral models). Psychologists specializing in this field, such as Ward Edwards, Amos Tversky, and Daniel Kahneman, began to compare their cognitive models of decision-making under risk and uncertainty with economic models of rational behavior.

Probably the most important publication in the development of behavioral finance, was written by Kahneman and Tversky in 1979. This paper, "Prospect theory: Decision Making Under Risk", used techniques from psychology cognitive, to explain a number of documented anomalies in rational economic decision-making. Other milestones in the development of the field included several well-attended conferences at the University of Chicago (see: Hogarth and Reder, 1987), as well as a special issue in 1997 of the respected Quarterly Journal of Economics devoted to the subject. of behavioral economics.

Basics

The basic theory of consumer demand is based on three assumptions:

1. Consumers clearly prefer goods to others;
2. Consumers face budgetary constraints;
3. Given their preferences, their limited incomes, and the prices of the different goods, they decide to buy the combinations of goods that maximize their satisfaction (utility).

More generally, the mainstream model of microeconomic behavior assumes that individuals make decisions in such a way as to maximize their utility function, using available information, and processing this information appropriately. However, behavioral economics research seems to suggest that Individuals deviate from standard models in three respects:

1. Non-standard preferences;
2. Non-standard beliefs;
3. Non-standard decision making.

It has been observed that, in the laboratory, individuals are inconsistent over time, show concern for the well-being of others, reward and punish others based on their intentions, and exhibit an attitude towards the risk that depends on frames and reference points. These facts, among others proven in psychology, have made us reconsider the assumptions of prevailing rationality, used in orthodox economics.

Methodology

In the beginning, the theories of behavioral economics and finance were developed almost exclusively from experimental observations and surveys, although in more recent times, real-world data has achieved a more relevant position. Functional magnetic resonance imaging (fMRI) has also been used to determine which areas of the brain are active during various steps of economic decision making. Experiments simulating market situations such as trading in different types of markets, studying consumer behavior and auctions, are seen as particularly useful, insofar as they can be used to isolate the effect of a particular behavior trend; Observed market behavior can typically be explained in many different ways, but carefully designed experiments can help narrow the range of plausible explanations. The experiments are designed to be incentive compatible, typically through interlocking transactions involving real money.

Key Observations

There are three main themes in behavioral economics and finance (Shefrin, 2002):

• Heuristics: People often make decisions based on "eye" approaches, and not applying strict rational analyses.
• Presentation: The way a problem or decision is presented to the decision maker can affect your action.
• Market inefficiencies: The attempts to explain the observed results of the market are contradictory to rational expectations and the theory of efficient markets. These include erroneous prices, irrational decision-making, and anomalous benefits. Richard Thaler, in particular, has written a long series of documents describing specific market anomalies, from a behavioral perspective.

Issues in Behavioral Economics

Models of behavioral economics

Models in behavioral economics are usually directed at a particular observed anomaly in the market and at modifying standard neoclassical models by describing how decision makers use heuristics and are affected by presentation and other effects.

Heuristics
Prospect Theory - Loss Aversion - Status Quo Tendency - Gambler's Fallacy - Self-Service Tendency

Presentation
Cognitive Presentation - [./Https://en.wikipedia.org/wiki/Mental%20accounting Mental Accounting] - Referential Utility

Anomalies
Endowment Effect - Stock Overprice Paradox - Money Illusion - Efficient wage hypothesis - Reciprocity - Intertemporal Consumption - Behavioral Life Cycle Hypothesis

Criticism

Critics of behavioral economics often insist on the rationality of economic agents. They counter that experimentally observed behavior is inapplicable to market situations such as learning opportunities, and that competition will ensure at least a close approximation of rational behavior. Others point out that cognitive theories, such as prospect theory, are non-generalized models of decision making in economic behavior and are only applicable to the type of instant decision problems presented to participants in experiments or surveys.

The individual goes to the product and makes the demand appear, the offer appears when the product appears in front of the acquisition action, if the demand increases, the supply increases, otherwise non-existence appears.

However; Not everyone who purchases a product can afford it, some people are faced with the acquisition of products in order to generate a profit that in turn allows them to acquire new and more products. As in the case of catalog sales. Many of them purchase the products for this purpose, and they are not always successful. Some advisers, and even coordinators of these companies, have boxes full of merchandise in their home rooms or offices. Some pay and others not so much. The important issue here is that these companies are not really interested in verifying if you actually sold the product or if you bought it and had real turnover. They only care about your sales. In a study carried out more than 3 years ago, I verified that the catalog market was destroyed by the same company. Well, in his eagerness to sell, he made so many registrations of people who would be possible advisers, that today most are advisers and have run out of real clients. Since the basic customers of these people were initially their close friends and relatives, and they ended up so tired of receiving the same offers every month that they no longer purchase the products with the same intensity with which they go to a shopping center to spend their money.. Therefore, some product accumulations are generating product expiration, products that were acquired and did not have a real rotation. Even if these are displayed on social networks, in a virtual store, or in a physical store. Which indicates that the current market has changed so much that the market war is latent. Each catalog actually has a product that is more sold than others as it happens in any store. The error lies in the fact that the business psychology of many of these catalogs is so elementary that it does not have a field of action in which it is guaranteed that all the products that a client purchases are really used, sold, and even that they generate real profit at the due time..

Behavioral Finance Topics

Key observations documented in the behavioral finance literature include the lack of symmetry between decisions to acquire or hold resources, colloquially called the "bird in the bush paradox", and the strong aversion to loss or regret attached to any decision where some emotionally valuable resource (eg a home) may be totally lost. Loss aversion appears to manifest in investor behavior as a disinclination to sell stocks or other securities if doing so might force the seller to make a nominal loss (Genesove & Mayer, 2001). It may also help explain why housing market prices do not adjust downward to the market equilibrium level during periods of low demand.

By applying a version of prospect theory, Benartzi and Thaler (1995) claimed to have resolved the stock overpricing paradox, something conventional financial models had been unable to do.

Behavioral Finance Models

Some financial models used in cash management and asset valuation use behavioral finance parameters, such as:

• Thaler model of price reaction to information, with three phases, infrarection - adjustment - overreaction, creating a trend in price.
• The image coefficient of a value

Criticism

Critics of behavioral finance, such as Eugene Fama, typically support the Efficiency of Markets Hypothesis. They argue that behavioral finance is more of a collection of anomalies than a true branch of finance and that such anomalies will normally be priced out of the market or explained by market microstructure arguments. However, a distinction should be noted between individual tendencies and social tendencies; the former can be averaged by the market, while the others can create feedback loops that drive the market further and further away from equilibrium.

Some have countered that the stock overpricing paradox simply arises due to barriers to entry (either practical or psychological) that have traditionally made it difficult for individuals to enter the stock market and that returns between stocks and bonds should stabilize to the extent that information technology opens the stock market to a greater number of operators. Others argue that most of the funds invested by individuals are managed through pension funds, so the effect of these entry barriers should be minimal. In sum, it appears that professional investors and fund managers are holding more bonds than might be expected given the spreads.

Outstanding Authors

Economy

Psychology

Finances