Behavioral economics can explain and predict complex economic phenomena in an effective way. Photo: FILE

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Traditional economics is a theoretical system that is premised on the assumption of a “rational person” and established by means of mathematical modeling. Behavioral economics, however, is based on psychological studies and reveals the psychological factors affecting a person’s actions and choices among various interests by means of studying their psychological traits and behavioral characteristics.

Behavioral economics is also called the economics of psychology. Ma Guangqi, dean of the School of Economics and Management at the Shaanxi University of Science and Technology, put forward that behavioral economics suggests that the study of economic actions should be based on psychological traits in reality. He continued to make the point that an agent of an economic activity is of limited rationality, and that agent makes decisions by relying on their psychological account and then proceeds following an illuminating and representative procedure. They care about their relative losses and gains, he said, adding that their decision preferences are generated during the decision-making process and these preferences can also be reversed.

Zhou Ye’an, a professor of economics at Renmin University of China, suggested that behavioral economics, on the one hand, inherits two fundamental ideas from neoclassical economics—the individualistic methodology and the subjectivist axiology. On the other hand, scholars of behavioral economics are unsatisfied with the impracticality of the behavioral assumption of neoclassical economics, and they propose a practical behavioral basis by means of introducing psychology, Zhou said. Psychology introduces more aspects that are in conformity with psychological facts, making behavioral economics’ original axiomatic assumptions more scientific and reasonable.

He Jingtong, a professor of economics at Nankai University, has posited that behavioral economics is majorly premised on, but not limited to, psychology. He continued by stating that disciplines such as the life sciences, physiology, brain science and cognitive science can also provide valuable sources for the development of behavioral economics. Neuroscience and cognitive science can also approach the theories of behavioral economics from different perspectives.

In terms of research methods, scholars of behavioral economics mostly borrow instruments from other disciplines, and all methods or tools that are effective in revealing the psychological formation mechanisms of an action can be used, said He Jingtong. Metering methods are unable to reveal the true psychological process underlying certain motivations and patterns of behaviors, while methods used in experimental economics and neuro-economics can also be used to address this dilemma.  

Behavioral economists make great contributions to analyzing complex economic phenomena, Zhou said. There are two notable types of efforts. One is to reestablish a modern model of behavioral economics by introducing behavioral factors into the traditional model of game theory, while the other is to establish a new modern model of behavioral economics by proposing an axiomatic assumption for modeling based on psychological facts.

Scholars of behavioral economics are not satisfied with analyzing individual actions, and they try to extend their theories to the fields of game-playing and social behaviors to form a behavioral game theory, Zhou suggested. In doing so, they will be able to make a deep study of the issues of learning, reciprocity and fairness in game-playing. Furthermore, by establishing and introducing the idea of social preference, problems of welfare economics, one of the most abstract fields of economics, can also be studied.

Ma went on to say that through the assumptions that stress a return to reality, the decision-making theory of behavioral economics has not only been further improved, but also become increasingly verifiable. A large amount of experimental data with microscopic accuracy has verified the strong predictive power of the decision-making models of behavioral economics, such as the expectancy theory.

In terms of the guiding role that behavioral economics plays in practice, He continued to mention that this discipline can explain and predict complex economic phenomena in a more effective way. In addition, it gives a more scientific and comprehensive picture of the multi-dimensional characteristics of the parties of an economic activity. Last of all, it pays attention to the subjective indicators rather than the single objective economic indicators, which is of value in promoting equity in income distribution, elevating the happiness of the people, and pursuing inclusive economic growth and social development.

 

(edited by CHEN ALONG)