Wednesday

 

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 12 of 16
…
Recently the field of behavioral economics has emerged, in which economists use basic psychology insights.
We’ll consider these insights here:
a· People aren't always rational
b· People care about fairness
c· People are inconsistent over time
…
a· People aren't always rational, continued.
Understanding behavior is easier once we don’t assume people always act rationally.
Why is economics built on the rationality assumption when psychology study results show 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.
…
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 are mostly content with imperfect but good enough models and theories.
… …
good enough models and theories
juubun yoi moderu to riron
(note - juubun can also be written jūbun)