...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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...Introduction The theory of bounded rationality is one that been a cause for discussion in economist circles around the world for many years. The theory, originally coined by Hebert Simon surrounded the limitation of humans to process the amount of information available to make a logical, economic decision and the consumer would therefore, settle for something that satisfyingly sufficient, or ‘satisfice’(Simon 1955). Furthermore, the theory expanded over time to also include mans use of heuristics to simplify cognitive effort in the decision making process (Simon and Newell 1972) and it was argued that ‘logical and economic’ decisions were never reached by humans due to emotions and judgement controlling the decision making process and causing a range of biases and errors (Tversky and Kahneman 1986). The theory identified that humans would use these heuristics, such as rule of thumb or an estimation, to find something that is satisfactory to their needs rather than making the ideal economic decision. I agree with the notion that the world is ‘too complex for people to solve problems by employing strict logical rules and comprehensive thought processes’ (Simon 1955) and am also of the belief that humans will rely on heuristics to make the cognitive process more straightforward. Rational Consumer Choice Rational consumer choice theory has been around for many years and stems from the ideal that consumers act in a ‘rational’ fashion when making economic decisions. Not as...
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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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...dependent on the drugs rather than depending on themselves and their mental faculties. It involves the users having cravings and compulsive behaviours which indicates that they do not just want or need the commodity but crave it and the deprivation of this commodity causes a significant amount of withdrawal symptoms which affects the user physically, psychologically and socially. The rational addiction theory developed by Becker and Murphy states that the addict is in fact a rational economic man who is able to make choices that maximize his utility and self interest. However once a person becomes addicted he or she is no longer thinking on his natural sense but his reason has been influenced by the drugs which makes him irrational. The consumer theory in economics states that a consumer would make decisions based on what would give them the most utility or satisfaction. Like all economic theory this is based on the fact that of course this individual is rational however due to the cravings and compulsions experienced from the drugs the individual is not rationally evaluating his cost- benefits analysis but is only thinking of the satisfaction he would get at the moment even though the long term repercussion is much more disadvantageous. The legalisation of drugs has been an issue all over the world with America having a higher no tolerance for drugs than Europe. Some economists believe that if drugs are legalised and the excise taxes on them increases then the demand for drugs...
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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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...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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...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 of analysis with scientific approach on social, emotional factors for understanding the consumers, investors and the...
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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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...and after the World War II. The formation of RAND was initially placed under the guidance of the Air Force, however, the sentiment of senior leaders in the military, government, and intellectuals participating felt that continuing under the umbrella of one of the branches of the military might stagnate the benefit of having a group of “free thinkers” from achieving great results. RAND was given independence to conduct research and this freedom of thought was “guarded” within this group of researchers. RAND attracted creative talent and individuals who were free thinkers who found comfort in not being held to a deadline or driven towards an A or B outcome choice. RAND fostered strategic thinking based on all of the intellectuals from various disciplines like economics, mathematics, research analysis, were placed in an environment with colleagues from the most influential intellectual institutions of the day as well as the federal sector, military and civilians branches of government. RAND received a grant from Henry Ford II ($1,000,000) which allowed the organization to become a non-profit organization with no direct oversight and agenda handed to the early key minds. These intellectuals could collaborate across fields and often bought in leading intellectuals that could contribute to the cause of connecting military scientist and industry, with several players coming from academia prior to the war, to figure out how science, social sciences, math,...
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...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 in explaining international political life. International Politics (2015) 52, 110–127. doi:10.1057/ip.2014.41 Keywords: rationalism; constructivism; rationality; norms; identity; international relations theory Introduction Since the 1990s, one of the major debates in International Relations (IR) scholarship has been between rationalism and constructivism (Katzenstein et al,...
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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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...Gary Stanley Becker (December 2, 1930 – May 3, 2014)[1] was an American economist. He was professor of economics and sociology at the University of Chicago and at the Booth School of Business. He made important contributions to the family economics branch of economics. Neoclassical analysis of family within the family economics is also called new home economics. He was awarded the Nobel Memorial Prize in Economic Sciences in 1992 and received the United States Presidential Medal of Freedom in 2007.[2] He was a Rose-Marie and Jack R. Anderson senior fellow at the conservative[3] Hoover Institution, located at Stanford University. Becker was one of the first economists to branch into what were traditionally considered topics belonging to sociology, including racial discrimination, crime, family organization, and drug addiction (see rational addiction). He was known for arguing that many different types of human behavior can be seen as rational and utility maximizing. His approach included altruistic behavior of human behavior by defining individuals' utility appropriately. He was also among the foremost exponents of the study of human capital. Becker was also credited with the "rotten kid theorem." Born to a Jewish family[4] in Pottsville, Pennsylvania, Becker earned a B.A. at Princeton University in 1951, and a Ph.D. at the University of Chicago in 1955 with thesis titled The Economics of Racial Discrimination.[5] At Chicago, Becker was influenced by Milton Friedman, whom Becker...
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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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...ANALYSIS OF MARKET COMPETITION, SWITCHING COSTS AND ITS CONSEQUENCES IN TELECOMMUNICATIONS IN NEPAL NAME: SAROJ POUDEL DEGREE: MASTER OF INFORMATION SYSTEMS/MASTER OF INFORMATION TECHNOLOGY COURSE: 7112ICT RESEARCH METHODS IN INFORMATION TECHNOLOGY INTRODUCTION The economics of switching costs and network effects have achieved a significant amount of popular, as well as professional attention in the last few decades. It is presently defined as the core factor for new Information Technology economy. Switching costs originates, if a consumer demands a product, or its related accessories(hardware or software), of his own purchases to be compatible with each other this creates economies of scope among his purchases from a single supplier. Whereas network effects arise when a user wants his system to be compatible so that s/he can interact or trade with other users, or switch to the same compatible system, which leads to the creation of economies of scope between different incompatible products. Thus these economies of scope impacts the consumer’s buying and switching behavior between various products. The state of lock-in arises when the switching cost is sufficiently high so that the consumer proceeds using the same product rather than switching to the different product. Lock in is the state where the cost of switching exceeds the benefits of switching. Economics of switching costs is the summation of various types of switching costs including: compatibility...
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