Behavioral finance FAQ / Glossary (Economic Behavior)

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This is a separate page of the B and E sections of the Glossary.
        This page is a spin off of the behavioral article

 

Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed/ discussed,
i: incidental

Behavioral biases

in finance / economics / management

This article has its own page

Behavioral economics

    (or economic behavior)


02/5i - 04/1i,7i,9i - 05/3i - 06/3i
+ see experimental economics,

socioeconomics, public choice,
unintended consequences,
behavioral finance, decision, bias

Trying to know what economic players have in mind?

How do they make choice,
not only between plums and strawberries?

Definition:

BE / Behavioral economics is a field of knowledge that studies how
people and institutions make their economic choices and apply
them in practice.

In other words, to recall what economics means,
BE focuses on how we behave
with money,
production, work, spending, investment...


What is looked for is

* how economic decisions are taken,

* how people behave individually and collectively on such matters,

* what are the effects on the economy.


Something crucial, don't you think, to know what
makes economic
deciders tick ...and makes you tick!

Biases and anomalies
     as key behavioral economics phenomena

When the non-standard ...is the standard.

Behavioral economics focuses mostly on

Individual and collective, cognitive, emotional
or reflexive (*) biases (**) that might affect
economic decisions.

Those biases might lead to:

Suboptimal outcomes for the decider (for example via a

defective anticipation of risks and rewards that leads to
bad choices)


More generally, economic anomalies.

The word "anomaly" is here usually taken in the sense of not
fitting a generally admitted criterion of economic riches
maximation
, with an optimum allocation of scarce
resources
.

Well, a generally admitted criterion, OK, but a highly
idealistic, unrealistic and subjective view,
as anomalies
are everywhere ;-). The trick is to focus on the most

blatant "economic mistakes
", that waste the most
efforts
and means.

(*) reflexive characterizes routines and automatic reaction.
(**) the "bias" article shows a synthesis of what those biases are.

  Also a full list of them (and of the related anomalies) is given
  in the glossary list

General categories of BE

Observing some economic phenomena with a
microscope and others with a telescope.

Behavioral economics findings (exploring the "anomalies" mentioned above)
weakens
various standard economic paradigms that are
based on the hypothesis of rational decisions.

But on the other hand BE does not offer its own general theory and general
laws.

Well in many other areas of knowledge also there are no laws that
explain everything
!

BE works and findings can be categorized according to
two classical fields of economics:

 Behavioral microeconomics

(behaviors related to categories of economic players).


Behavioral macroeconomics (effects on economic

aggregates: consumption, investment, GDP growth,

foreign trade, monetary evolutions..).

Also Behavioral economics methods and findings are close to those of
Behavioral finance, those two fields of knowledge being strongly related.

Private and public economic players

In the economic playground,
some players might be smarter than others.

But all of them contribute to the common result.

Behavioral economics can also be split according to two types of economic
institutions /
players: public administration and private players (themselve as
individuals or organizations).

Each of those two categories and every one of their members;

has its own decision-making node and behaviors.

can bring its own rationality and efficiency,

but can bring also, if there is a lack of counter powers, its own

unintended effects, economic anomalies and misallocations of
resources.

Here is how the game is fed and by whom:

Market behaviors include the various market-related
    actions
(decisions to buy, sell, work, save, invest, borrow or
    whatever)
    of private
players (and some public players that might interfere,
   
see below "public choice"), such as: 

General population economic categories, such as

consumers, workers,other producers, traders and distributors,

To take more specific examples, business managers 

(see behavioral corporate management) or entrepreneurs,

And the financial sector:

* Financial institutions (insurance, banks, funds...),

* Investors, as they have their own role in the allocation of
   economic resources.

* Also depositors, borrowers, insurance policy holders...


Public choice (see that phrase + behavioral public
    economics / finance),

Here, decisions are made by public authorities, or by the electors
who appoint them.

Detailed fields of applications

BE clients?

To enter into more details, behavioral economics finds a
full range of applications, in, among other fields,

General macro / micro economic issues:

Quantitative behavioral economics

Economic analysis and forecasting, for the whole economy
or for a specific industry.

Economic policy

Budget decisions and economic regulations by state and local
administrations.

Monetary decisions

Money supply policy by central banks.


Psychological behavioral economics aka
    Economic psychology
:

This area of knowledge deals with individual

behavioral biases when making
economic-
related decisions (and how to correct them).

Those "intimate" aspects are studied by
neuroeconomics (see that word).

The "behavioral biases" article and many other articles in
this glossary (on rationality, emotion, heuristic, mimicry,
framing...)
gives some hints.

Experimental economics try also to elucidate some aspects by
making people act individually or in small groups, even if it is
dubious to extent the findings to the whole economic world


Corporate strategy and management

(see the "behavioral corporate management" article).

And, as an important subfield, marketing: it adapts products

and selling methods to the behaviors and styles of customers
and prospects.

It uses for example "behavioral segmentation", "neuromarketing",
and other research techniques.

And also, as a parallel field (not related only to corporations),
  
the
psychology of work.

An example of research in this area is the part played by
incentives and trust as factors to manage and motivate the
workforce. Giving false information or false promises can be
disastrous in this respect.


And, of course, investing and
    money management:

Here we have behavioral finance (see the related article)

What about the ethics?

Kind and fair?

Behavioral economic / finance studies and findings are sometimes
accused  of being
used
as a tool of manipulation .

But to know its findings can on the contrary
be precious to protect oneself against
manipulation (including ...self-manipulation).

Behavioral public
   economics / finance


04/9i,12i + see public choice
bias, public behavioral finance,

overconfidence in regulations,
moral hazard

How does the king behave?

Behavioral public economics / finance (or public behavioral economics /
finance) is a nascent field of research.

It applies behavioral concepts (rationality, heuristics, biases) to

Public finance (planning, budgeting, spending,

tax system, public borrowing...),

And economic policy / regulation / monitoring...

Here, the issues about the rationality of decisions are quite similar to those
found
in behavioral finance / economics generally.

Human biases are biases, whatever the system.

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the BF Group, please
 vote on the glossary quality at
BF polls

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This page last update: 11/09/15  

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