...When to Apply Rational Choice Theory A widely used model to study human behavior, called Rational Choice Theory, helps to simplify social phenomena by assuming these properties: utility maximization, consistency, expected value, individuals as relevant agents, homogeneity, and equilibrium. Almost all social scientists, especially economists, use this model to predict human behavior, and sometimes their results may contradict the actual phenomenon; in other words, they were unaware that their experiments failed to meet one or more of the Rational Choice Theory assumptions. For example, in situations like enlisting in the military and eventually going to war, where individuals fail to maximize utility and contradicts the assumptions of the Rational Choice Theory, applying the theory would be nonsensical. However, when dealing with situations in which individuals behave rationally like sex workers in the prostitution industry, whereby all Rational Choice Theory assumptions are met, the theory explains phenomena exceptionally well. The example of soldiers going into battle clearly contradicts the assumptions necessary for the Rational Choice Theory to hold. By definition, a rational human being would choose the option that gives him the highest level of utility. In deciding to join the military and fight in war, the costs of making this decision heavily outweighs the benefits. Comparatively, this problem resembles the “Voter’s Paradox” in which Anthony Downs explained using a...
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...commonly drawn between the “historical” and the “rational choice” variants of institutionalism and shows that there are more points of tangency than typically assumed. However, differences remain in how scholars in the two traditions approach empirical problems. The contrast of rational choice’s emphasis on institutions as coordination mechanisms that generate or sustain equilibria versus historical institutionalism’s emphasis on how institutions emerge from and are embedded in concrete temporal processes serves as the foundation for the second half of the essay, which assesses our progress in understanding institutional formation and change. Drawing on insights from recent historical institutional work on “critical junctures” and on “policy feedbacks,” the article proposes a way of thinking about institutional evolution and path dependency that provides an alternative to equilibrium and other approaches that separate the analysis of institutional stability from that of institutional change. INTRODUCTION Institutional analysis has a distinguished pedigree in comparative politics, and the “new” institutionalist literature of the past two decades has both sustained this venerable tradition and deepened our understanding of the role of institutions in political life. At the same time, recent work has given rise to new debates. It is now conventional to distinguish three different varieties of institutionalism: rational choice institutionalism, historical institutionalism, and...
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...On Ethics and Economics Amartya Sen Blackwell Publishers, 1987, pp. 148, Rs. 271 ‘On Ethics and Economics’ by Amartya Sen centres on a particular phenomenon that the author considers unfortunate to the discipline. In this book, Amartya Sen talks about the continued and ever increasing distancing of economics from ethics. This book has three chapters and under each chapter, there are sub topics. That makes the book more structured and easy to understand even for a person who is not so competent in the study of Economics. Though the book was written in 1987, most of the arguments still apply in todays’ world. Amartya Sen starts off with an Edward Clerihaw Bentley verse about a major practitioner of political economics and this sets the tone for the rest of the book. The author basically tries to argue that ethics-related tradition of Economics dates back to the days of Aristotle and that Economics ultimately goes hand in hand with the study of Ethics and Politics. Amartya Sen certainly and in a very obvious manner, questions the disassociation of the study of Economics from that of ethics and political philosophy. Hence, this book is undoubtedly a very important reading for those who are interested in connecting the dots between economics and business ethics. Professor Sen, while agreeing that the ‘engineering’ approach to Economics has been often fruitful, criticises the same ‘engineering approach’ by saying that it has substantially impoverished the modern economics because...
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...Laroche being prescriptive and descriptive Laroche follows a prescriptive method in arguing for decision making theory. He argues it is a social representation which will improve decision making. In his abstract he writes “The paper argues that […] the concept of organizational action should not be opposed to decision and decision-making. Decision and decisionmaking are best understood as social representations […]. As organization members think and act in terms of decision-making, a theory of organizational action cannot simply do without a theory of decision-making. “ showing clearly that he is prescribing a certain way of looking upon decision-making. This is further strengthened in the conclusion where he for example writes “This paper argued that decision-making is best understood as a process of reality creation through organization members’ representations of their own role and activity.” The extent to which Laroche is prescriptive is debatable however. He acknowledges descriptive factors such as when he claims in conclusion that “no theory of action can develop without integrating the fact that, to a significant extent, organizational members think and act in terms of decision-making... a relevant phenomenon for a theory of action, not a marginal one”. He lists examples from empirical studies in describing the decision-making process: “bureaucratic processes (e.g., Cyert and March 1963, Carter 1971), political processes (e.g.. Bower 1970), psychological...
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...Chapter 18 A SURVEY OF BEHAVIORAL FINANCE ° NICHOLAS BARBERIS University of Chicago RICHARD THALER University of Chicago Contents Abstract Keywords 1. Introduction 2. Limits to arbitrage 2.1. Market efficiency 2.2. Theory 2.3. Evidence 2.3.1. Twin shares 2.3.2. Index inclusions 2.3.3. Internet carve-outs 3. Psychology 3.1. Beliefs 3.2. Preferences 3.2.1. Prospect theory 3.2.2. Ambiguity aversion 4. Application: The aggregate stock market 4.1. The equity premium puzzle 4.1.1. Prospect theory 4.1.2. Ambiguity aversion 4.2. The volatility puzzle 4.2.1. Beliefs 4.2.2. Preferences 5. Application: The cross-section of average returns 5.1. Belief-based models 1054 1054 1055 1056 1056 1058 1061 1061 1063 1064 1065 1065 1069 1069 1074 1075 1078 1079 1082 1083 1084 1086 1087 1092 ° We are very grateful to Markus Brunnermeier, George Constantinides, Kent Daniel, Milt Harris, Ming Huang, Owen Lamont, Jay Ritter, Andrei Shleifer, Jeremy Stein and Tuomo Vuolteenaho for extensive comments. Handbook of the Economics of Finance, Edited by G.M. Constantinides, M. Harris and R. Stulz © 2003 Elsevier Science B.V All rights reserved . 1054 5.2. Belief-based models with institutional frictions 5.3. Preferences N. Barberis and R. Thaler 6. Application: Closed-end funds and comovement 6.1. Closed-end funds 6.2. Comovement 7. Application: Investor behavior 7.1. 7.2. 7.3. 7.4. 7.5. Insufficient diversification Naive diversification Excessive trading The selling decision...
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...also examines the effects of accounting standards on management’s self-interest hence PAT recognizes management biased attitude on accounting standards which are likely to affect corporates lobbying on accounting standards. Pat also identifies certain factors that are expected to affect a firms cash flows and share price .These factors are taxes, political costs and information production and management compensation. PAT theoretically played its role in examining whether accounting information is useful to the stock market and which accounting measurement basis management practices, and why they practice. It has laid a great deal of empirical research on the link between accounting numbers and stock prices and determinants of accounting choices by management (Kabir). PAT once again exercised its role in the improved understanding of various...
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...THE NEW ECONOMICS in the SPECIAL ISSUE NEW WORLD The End of Rational Economics Your company has been operating on the premise that people – customers, employees, managers – make logical decisions. It’s time to abandon that assumption. | by Dan Ariely IN 2008, a massive earthquake reduced the financial world to rubble. Standing in the smoke and ash, Alan Greenspan, the former chairman of the U.S. Federal Reserve once hailed as “the greatest banker who ever lived,” confessed to Congress that he was “shocked” that the markets did not operate according to his lifelong expectations. He had “made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders.” Jacob Thomas 78 Harvard Business Review | July–August 2009 | hbr.org hbr.org | July–August 2009 | Harvard Business Review 79 THE NEW ECONOMICS in the NEW WORLD. We are now paying a terrible price for our unblinking faith in the power of the invisible hand. We’re painfully blinking awake to the falsity of standard economic theory – that human beings are capable of always making rational decisions and that markets and institutions, in the aggregate, are healthily self-regulating. If assumptions about the way things are supposed to work have failed us in the hyperrational world of IN BRIEF Wall Street, what damage have they done in other institutions » The global economic...
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...The primary assumptions of Rational Choice Theory, is the beliefs that “human beings are rational and self-interested beings who are affected by the consequences of their actions” (Miller, 4). It is said that a person considers reason to their actions, such as: opportunities; the results that may come of the actions (advantages), costs, benefits. A person is capable of finding reasons to support their actions or at least try to create something to make them feel like the decision they make is justifiable; “rational choice theorists is not that individuals are purely rational in their decision making, but rather that they do consider the costs and benefits” (Hagan, 116). Miller (2009), said that “various costs and benefits that are considered by the would-be offender are the subjective ones” (p. 8), in other words, a soon to be offender will choose to commit an offense after...
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...off if she alone were exempt from the tax; she benefits when everyone (including herself) must pay the tax. In this paper, we are concerned with a third form of regulation: paternalistic regulations that are designed to help on an individual basis. Paternalism treads on consumer sovereignty by forcing, or preventing, choices for the individual’s own good, much as when parents limit their child’s freedom to skip school or eat candy for dinner. Recent research in behavioral economics has identified a variety of decision-making errors that may expand the scope of paternalistic regula- Professor Camerer is the Rea and Lela Axline Professor of Business Economics, California Institute of Technology; Professor Issacharoff is the Harold R. Medina Professor of Procedural Jurisprudence, Columbia Law School; Professor Loewenstein is a Professor of Economics and Psychology, Carnegie Mellon University; Ted O’Donoghue is an Assistant Professor of Economics, Cornell University; and Professor Rabin is a Professor of Economics, University of California at Berkeley. Our thanks to participants at the University of Pennsylvania Law School Symposium on Preferences and Rational Choice, the University of Southern California Olin Workshop, the Columbia Law School faculty...
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...PDF hosted at the Radboud Repository of the Radboud University Nijmegen This full text is a publisher's version. For additional information about this publication click this link. [http://hdl.handle.net/2066/19379] Please be advised that this information was generated on 2012-09-19 and may be subject to change. Buying Impulses: A Study on Impulsive Consumption Astrid Gisela Herabadi Buying Impulses: A Study on Impulsive Consumption Astrid Gisela Herabadi PrintPartners Ipskamp ISBN 90-9017360-9 Cover illustration: A part of the stone-reliefs in “Candi Borobudur” Buying Impulses: A Study on Impulsive Consumption Een wetenschappelijke proeve op het gebied van the Sociale Wetenschappen Proefschrift ter verkrijging van de graad van doctor aan de Katholieke Universiteit Nijmegen op gezag van de rector magnificus Prof.dr.C.W.P.M. Blom, volgens besluit van het College van Decanen in het openbare te verdedigen op woensdag 17 december 2003, des namiddags om 1.30 uur precies door Astrid Gisela Herabadi geboren te Bogor op 30 december 1969 Promotores: Prof. dr. B. Verplanken (University of Tromsø, Norway) Prof. dr. A.F.M. van Knippenberg Manuscriptcommissie: Prof. dr. J.A.J.P. Janssen Prof. dr. N.K. de Vries (Universiteit Maastricht) Prof. dr. M. Zeelenberg (Universiteit van Tilburg) Buying Impulses: A Study on Impulsive Consumption A scientific essay in Social Sciences Doctoral thesis to obtain the degree of doctor from the...
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...Original Article Rationality, norms and identity in international relations Ji Young Choi Department of Politics & Government, Ohio Wesleyan University, Elliott Hall 204, Delaware, OH 43015, USA. E-mail: jychoi@owu.edu Abstract This article examines major debates between rationalism and constructivism. It presents that there are politically significant motives of social actions, including norms and identity, which cannot be completely subsumed by the concept of instrumental rationality. These ideational or social-psychological motivations are governed primarily by thymos or affect (the moral or emotional part of the human personality) and/or valueoriented rationality. We need more flexible assumptions about main actors and their motives than those of rationalism to explain appropriately the politics of anger, loyalty and a sense of justice at international levels. However, constructivism’s emphasis on ideational motivations cannot totally replace rationalism in explaining international political life. Constructivism maintains that identity or norms are causally prior to actors’ interests. Yet when there is conflict between pursuit of interests and maintenance of identity or norms, actors’ strong and well-defined self-interests can overrule their contested or unstable identity or norms. In short, causal arrows can flow in either direction between identity or norms and interests. This implies that rationalism and constructivism are complementary rather than competitive...
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...The Wire Paper “The Wire” was a television program that aired on HBO from 2002 – 2008. It has received 2 Emmy nominations and is a critically acclaimed program that had received very positive reviews when it was still on the air. The characters on the program, both criminal and judicial, are all well-developed, rounded characters that help to display a realistic view of life in Baltimore, Maryland. One of the criminals on the program is a man named Omar Little. Barack Obama stated that Omar Little was his favorite character on the program: “He is not my favorite person, but he’s a fascinating character– a gay gangster who only robs drug dealers and then gives back. But he’s the toughest, baddest guy on the show, and he’s gay. He’s a fascinating character” (Goldman, 2009, p. 1). After watching several episodes of The Wire, it is easy to see why people like this character, even though he is a known criminal who has committed robbery and murder several times. Omar Little is a homsexual, black male, who is seen spending time with boyfriends, yet, he goes against the gay stereotype of being sensitive, and kind, and is one of the most dangerous criminals in Baltimore. He isn’t afraid to pull the trigger of his gun, and he participates in robberies of dangerous drug lords as well as getting involved in inter-gang rivalries. He displays a passion for poetry, and for Greek mythology (shown in Season 2). For a character like Omar Little to be understood, it is important to realize that...
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...All of economics is meant to be about people’s behavior. Behavioral Economics is a field of economics that studies how the actual decision-making process influences the decisions that are reached. The standard economic theory is known as neoclassical economics. Neoclassical economics stops short of trying to explain where people’s preferences come from, but it does not take account of the direct influence of other people’s behavior and social standards on our behavior. The theory imagines we independently know what we want and that our preferences are permanent. This standard theory is very good at explaining short-term decision-making (I want green vegetables and choose beans as they are on special offer) but cannot explain longer-term changes in preferences (I now only choose organic food). Along the same lines the importance of institutions – both formal institutions such as regulations, and informal ones, for example, how people organise markets – and the evolution of the whole economic system are not subjects of neoclassical analysis. This has significant implications Behavioral economics has evolved to be a separate branch of economic analysis which applies scientific research on human and social, cognitive and emotional factors to better understand economic decisions by consumers, borrowers, investors, and how they affect market prices, returns and the allocation of resources. Behavioral economics is that branch of one, which deals with the study and application...
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...Assess the view that religion is not in decline but simply changing as a result of changes in wider society (33 marks) Wilson defines secularisation as when “religious beliefs, practices and institutions lose social significance”. Secularisation theorists argue that religion is in decline. However, others have argued that religion is not in decline, but it is in fact changing. They believe it is changing in accordance to the changes within society such as greater individualism, consumerism, or a shift towards postmodern societies. Grace Davie argues that religion isn’t declining but is taking a much more privatised form. She argues that we now have believing without belonging, where people hold religious beliefs but don’t necessarily go to church because they don’t feel they have to go to church. Therefore, the decline in traditional religion is matched by the growth of a new form of religion. Davie notes a trend towards vicarious religion, which is where a small number of professional clergy practice religion on behalf of a much larger group of people, who experience it at second hand. This pattern is typical in Britain where church attendance is low, but people still use the church for rites of passage (e.g. baptisms, weddings and funerals). She compares vicarious religion to the tip of an iceberg and sees it as evidence for believing without belonging. For example, people may not be able to attend church due to work commitments, they have children to look after or maybe they...
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...Crime One of the best theories best known for methodological approaches would be a rational choice. Individuals are a unit of analysis at which to study society. Society is not made up of a large number of individuals; it can contain organizations and groups. Any general sociological theory is able to tell how the social structure can come into being as well as how they can be maintained. The rational choice theory will explain how the human race behaves for the most part. There are some limits to the theory. Rational choice theory is based on the idea that individuals act for a particular purpose, that is to maximize their utility. In the simplest way, rational choice theory will say the given number of different options that people will do, because they believe that it will have the best outcome. The field of political science rational choice theory is usually used. Rational choice theorists argue that the study of political analysis need not necessarily include every detail of political information, such as dates, names and places, but that an alternative view can offer a distinctive insight into the nature of political life. An assumption made by rational choice theorists is, every human is motivated by self-interest and will figure out their own moves so that they can maximize their own interests. The rational choice theories are more likely to deter property crimes than to violence crimes if increased sanctions are put in play. The increased sanctions will...
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