Traditional economic theory is populated by principles and concepts that shape the human being as a rational individual, known as homo economicus. This individual, analyzing all available information, would make decisions based on quantitative calculations.
For example, consumers think about how to maximize their consumption, given their budget constraints. Business managers maximize their profits by calculating budget, costs and benefits. But as Gregory Mankiw well described it, "real people, however, are Homo sapiens". Although the human being is somewhat similar to this economic being - rational and calculating -, it is more complex.
Homo sapiens' decisions can be influenced by factors such as habits, culture, personal experience and emotion, as well as by other people's behavior. In general, individuals have difficulty balancing short and long-term demands and often make decisions that satisfy their needs only in the present moment.
Thus, behavioral economics has recently emerged - as opposed to the traditional view - in an attempt to better understand the decisions of individuals and markets, taking into account these subjective factors. It uses both aspects of mainstream economics and psychology, neuroscience, among other fields in the social sciences. In other words, behavioral economics seeks to understand and model people's decisions in a more realistic way.
To get an idea of ??the recent importance of this area, the study of behavioral economics has already won two Nobel Prizes in Economics: to psychologist Daniel Kahneman, in 2002, and economist Richard Thaler, in 2017. In case you are more interested in this subject, I recommend the books Fast and Slow: the two ways of thinking, by Kahneman, and Misbehaving: the construction of behavioral economics, by Thaler.
In this perspective, I'm going to present some discoveries of this “new” economy.
The first one
Individuals are overconfident. Research shows that 80% of people consider themselves to be above average in terms of their skills as a driver, sense of humor, leadership skills, among others.
Likewise, several investors believe that their ability to beat the market is above average. Having a lot of money, academic training and access to information and technology induces individuals to behave in a self-confident manner. In reality, however, winning the market is extremely difficult: this type of behavior can lead to considerable losses.
Another interesting result is that people are reluctant to change their minds. They tend, actually, we tend to give more weight to the evidence that confirms our own beliefs.
For example, when we read an investment report a Crypto project, we try to see the positive and negative sides of them. But often, even with relevant negative points, investors - because they like the business in question - give more importance to positives.
In this way, two people, when looking at the same report, can present opposite interpretations due to their personal preferences.
Tomorrow part 2 will be up with herd behavior.
