BEHAVIORAL ECONOMICS
Behavioral economics, along with the related sub-field behavioral finance, studies
the effects of psychological, social, cognitive, and emotional factors on
the economic decisions of individuals and institutions and the consequences
for market prices, returns, and resource allocation, although not always that
narrowly, but also more generally, of the impact of different kinds of behavior, in
different environments of varying experimental values.
Risk tolerance is a crucial factor in personal financial decision making. Risk
tolerance is defined as individuals' willingness to engage in a financial activity
whose outcome is uncertain.
Behavioral economics is primarily concerned with
the bounds of rationality of economic agents. Behavioral models typically
integrate insights from psychology, neuroscience and microeconomic theory; in
so doing, these behavioral models cover a range of concepts, methods, and fields.
The study of behavioral economics includes how market decisions are made and
the mechanisms that drive public choice. The use of the term "behavioral
economics" in U.S. scholarly papers has increased in the past few years, as shown
by a recent study.
There are three prevalent themes in behavioral finances:
KEYNESIAN ECONOMICS
Keynesian economics are the various theories about how in the short run
and especially during recessions economic output is strongly influenced
by aggregate demand (total spending in the economy). In the Keynesian
view, aggregate demand does not necessarily equal the productive capacity
of the economy; instead, it is influenced by a host of factors and sometimes
behaves erratically, affecting production, employment, and inflation.
CLASSICAL ECONOMICS
Classical economics (also known as liberal economics) asserts
that markets function best with minimal government interference. It was
developed in the late 18th and early 19th century by Adam Smith, Jean-Baptiste
Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill. Many writers
found Adam Smith's idea of free markets more convincing than the idea, widely
accepted at the time, of protectionism.
Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the
beginning of classical economics. The fundamental message in Smith's influential
book was that the wealth of nations was based not on gold but on trade: That when
two parties freely agree to exchange things of value, because both see a profit in
the exchange, total wealth increases. Classical economics originally differed from
modern libertarian economics in seeing a role for the state in providing for the
common good. Smith acknowledged that there were areas where the market is not
the best way to serve the common good, and he took it as a given that the greater
proportion of the costs supporting the common good should be borne by those
best able to afford them.
Classical economists observe that markets generally regulate themselves, when
free of coercion. Adam Smith referred to this as a metaphorical "invisible hand",
which refers to the notion that private incentives are aligned with society welfare
maximization under certain competitive conditions. Smith warned repeatedly of
the dangers of monopoly, and stressed the importance of competition.
There is some debate about what is covered by the term "classical economics",
particularly when dealing with the period from 183075, and how classical
economics relates to Neoclassical economics.
The Classical economists took the theory of the determinants of the level and
growth of population as part of Political Economy. Since then, the theory of
population has been seen as part of Demography.
In contrast to the Classical theory, the determinants of the neoclassical theory
value:
1. tastes
2. technology, and
3. endowments
LABOUR ECONOMICS