Saturday, March 26, 2011

Behavioral Economics

One of the great things about economics is that the models are fundamentally simple, particularly for Microeconomics. By simple, I don't mean that all of the implications are obvious or that that we can figure out what those implications are without doing some math. However, much of economics is encompassed by the idea that people are trying to do the best that they can with their limited resources, and as a result we would expect voluntary exchange between fully informed parties to make both players better off (or at least no worse off).

Part of the joy of behavioral economics is how it demonstrates where predictions from the reductionist economics approach to modeling human interactions badly and consistently miss how actual humans behave. An illustration of this comes from a recent Dilbert.

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