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Behavioral Economics— the Favorite Scapegoat of Economists

I have been hooked about discussing every nook and cranny relating to business and economy for a while now.


In the past, people hunted and foraged to stay alive. They strived and worked hard every day to avoid certain death from predators and starvation. Humankind then found a way to grow food without ever leaving an area, leading to a change into settler lifestyle. After settling and building a permanent residence, people honed their talent instead of becoming a jack-of-all-trades.

In a settlement, people are focusing on particular jobs that suit their interests. For example, some people enjoy working on a dairy-farm while the minority prefers laboring in woodcutting jobs. So, they traded to accommodate the many needs to stay alive. Thus, the skills of trading and economics were born in this period.

Only a few sets of skills are used from its discovery until now. For example, many scholars sought astrology and alchemy in the past. But there is no master of alchemy today because the field of study doesn’t benefit many people. On the other hand, economics is still one of the most beneficial skillsets to study now. By learning economics, individuals will make a better choice regarding resources.

The Great Leap of Economics


Economics become popular when Adam Smith wrote his magnum opus: The Wealth of Nations. Smith’s perspective on economics and society is influential until now. Modern economists agree that this man is the equivalent of Isaac Newton in Physics. They both contribute to theory and solve problems that are unknown to most people. But it is a boost in scientific studies when solved.

“The only function of economic forecasting is to make astrology look respectable.”

— John Kenneth Galbraith

The breakthrough that Adam Smith formulated was today known as classical economics. Classical economics tackle the why and how of the market phenomenally. The volatile trading and unpredictable trend were able to be digested using Smith’s theory. Furthermore, he explains the needs and why people need certain items based on logical assumptions. His word is the law of the market during that time.

Like enforcement law, these ideas sometimes break when facing specific conditions. As an illustration, Newton’s classical physic does a great job when explaining general physics. But it fails to explain many phenomena at the molecular level. Interestingly, Classical economics is no different than physics. Many ‘proven’ theories are obsolete in some cases.

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Blaming Behavioral Economics


Classical economics believes that every person will choose the best option if he/she has all the information needed, but people rarely behave that way. For example, an experiment exists where a school moved its unhealthy food to a less-visible place in the cafeteria. The kids would still know that junk food is available, but the consumption of these kinds of food plummeted somehow.

Scientists also conducted a study about the relation of cost and satisfaction within the human brain. They interviewed candidates who tasted two different wines with a gap in the price tag. Most people said that the higher price one tastes better, even though some of the wine for testing is the same brand. Yet, satisfaction doesn’t correlate with higher costs in classical economics.

The one main criticism regarding classical economics is its dependency on Ceteris paribus. To predict the economy, the expert will always assume that every person relies on logic to choose their option. The influence of emotions is non-existent in this field of study. Only after the period of John Keynes, the irrational belief of humans is widespread and is used to predict the market.

Companies Enjoy Manipulating Using Behavioral Economics


After studying human irrationality, one could gather the information that people value for a different interpretation. For example, some brands prefer to write 1.500 grams instead of 3 pounds because the first sound more massive. Products that are written or promoted with an unusual approach will result in different effects for the customers.

Marketing teams trick people by seemingly lower costs for services or goods. As an illustration, GYM membership that costs two dollars a day is the same, with the one costing 730$ a year. But in reality, the cost of both of these services are the same. Yet, individual will feel inclined to buy the former because he/she don’t mind paying what is seemingly lower-priced.

Humans are observed to felt more significant pain when losing instead of joy gained when acquiring. So, it is better to manipulate buyers to think that they will lose money when not buying particular products. No brand will promote itself with a slogan of “ Buy this and get extra money to spend!” instead of “ Buy this and save money!”

There Is a Reason Why Humans Are at the Top of the Food Chain

Humanity has evolved through countless catastrophes in the history of the world. When other organisms choose strength or agility, humankind decided to hone their mind as no other animals have done. So, it is fair to say that the mind’s remarkable adaptability cause the volatility of irrational behavior.

“Human Behavior flows from three main sources: desire, emotion, and knowledge.”

— Plato

© 2020 Azkra Fariyz Fadhilah

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