tudor.totolici

Many types of behavior can be well understood in terms of people coherently maximizing utility that they anticipate, but failing to make rational choices because they either don’t think “globally” about all of their choices, or systematically mispredict how they will feel in the future.

• Other people’s behavior matters
• Habits are important
• People are motivated to ‘do the right thing
• People’s self-expectations influence how they behave
• People are loss-averse
• People are bad at computation
• People need to feel involved and effective to make a change

The standard economic theory is known as neoclassical economics. Neoclassical economics stops short of trying to explain where people’s preferences come from, so it does not take account of the direct influence of other people’s behaviour and social norms on our behaviour. The theory assumes we independently know what we want and that our preferences are fixed. 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 organize markets – and the evolution of the whole economic system are not subjects of neoclassical analysis.