Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 7 Topics for Further Study
Chapter 22 of 36 Frontiers of Microeconomics
Section 14 of 18
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are important for understanding economic phenomena.
One example is from study of 401k plans, the retirement savings accounts firms often offer their workers.
In some firms workers can choose to enroll in the plan by filling out a simple form.
In other firms workers are automatically enrolled, and can opt out by filling out a simple form.
It has been found many more workers participate in a 401k plan when it is the second case, when automatically enrolled, than in the first.
If workers were perfectly rational maximizers they would choose to participate in a 401k plan regardless of whether or not their employer automatically enrolled them.
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Understanding behavior is easier once we don’t assume people always act rationally.
Why is economics built on the rationality assumption when psychology and study results people don’t always act rationally?
One answer is the assumption of rationality is true enough to yield reasonably accurate models of behavior, people are mostly rational.
The assumption firms rationally maximize profits yields many important and valid insights.
But if we included complex psychological deviations from rationality models of firms’ behavior would become complicated, making those insights harder to find.
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Economic models are an aid to understanding and are not meant to completely replicate reality.
They are meant to show the essence of the topic.
Economists themselves are not rational maximizers.
Like most people, they are overconfident and are reluctant to change their minds.
Their choice among alternative behavior theories may hindered by the inertia of their preconceptions.
Looking at the same information some economists think less government involvement would solve a problem better and others think more government would be better.
Economists often are content with an imperfect but good enough theory.
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