Economics and Psychology Essay Example | Topics and Well Written Essays - 1250 words

Economics and Psychology - Essay ExampleEvidence also proved that offers spurned when they came from a person would be accepted if they were gene localised by a computer.The assumption of tenableness is non wholly true as citizenry do not always make sharp-witted decisions. In scotchs, rationality is understood to be an approximation with hope that departures from rationality are rare. Some economists have argued that some deviations from rational do not matter (Akerlof & Yellen 1985). Psychology have challenged the assumption of rationality which is the basis of economic internal utility. The concepts of bounded rationality was introduced in an attempt to formulate a theory of rational choice (Simon 1955).Economists foresee the behavior of agents by assuming that they have stable, well-defined preferences and they make rational choices in consistence with preferences of the markets. Loewenstein & Thaler (1989) hold a number of anomalies within empirical results which are difficult to rationalize.Economic theory makes exact prognostic of the discount rate of money people should apply utilizing the after-tax market value of interest. High discount order are experienced in some contexts and by some groups which raises questions concerning the rationality of consumers. Economic theories of soul behavior are vague and un-testable. Intertemporal decisions are related to the spread of costs and benefits over time. The rationality of many intertemporal decisions particularly individual and self-control choices are challenged. Psychology of intertemporal choice complicated the question of selecting the proper social rate of discount. Standard computation of discount rate is determined by the standard rate of interest adjust for tax distortions. Adjusting tax distortion is complicated by the internalization of capital markets. It is suggested to determine time preferences at the individual level to avoid these complications. The individual rate should b e consistent across all individual belongings. Economists do not agree with the psychology of decision making. Evidence from psychological research proved that individuals did not follow rational choices. However, psychologists did not provide means to incorporate these findings in economic models. However, psychologists affect and benefits economic theories in a number of other cases. For example, in the case of wave profiling, psychology experimented and observed that people care about changes in wages in addition to absolute values of their wages. This could affect the write of increasing wages in addition to the discount of the future. In this example, psychology suggested modification to the utility process of wage determination. Psychology provided testable assumptions which are supported by experimental evidence. Smith, V. (1991). Rational Choice The contrast in the midst of Economics and Psychology, Journal of Political Economy, vol. 99. No. 4., University of Chicago Pres s.Smith (1991) examined the contest between economic theory and evidence from psychology with respect to experimental economics. He argued that rational choice is a combination of some(prenominal) rationalists from psychology and behavioralist from economics. Smith