What is Behavioral Financial Economics?

What is Behavioral Financial Economics? The birth and development of behavioral economics. The idea that humans are rational beings with the ability to think and intend is widely accepted. Do you believe that people in general always act rationally? In other words, do you predict human behavior based solely on rational reasoning?

Let's move on to another question. Do you really think that all the spending, budgeting, and saving you have been doing has been done for rational reasons? Do you fit the definition of what classical economists call "homo economicus"? Are you a person who proceeds from your own interests and concerns in material decisions and therefore reasons logically in all situations?

What is behavioral economics?

In a social experiment in behavioral economics conducted by a behavioral economics team, a letter signed by the country's tax authorities was sent to the mailboxes of Guatemalans.

The letter stated that over 65% of the population had paid their taxes and that those who had not yet done so should submit their taxes as soon as possible.

So how did the concept of behavioral economics come about, how did it influence economic theory, and how can we find answers to these questions together?

The social tax system

The rate of tax payment in the United States is quite low. However, most of the citizens who received the letter paid their taxes within a short period of time.

In fact, about three months after the letter was received at their address, the tax payment rate was found to have increased by 43%. Thanks to the information provided that most Guatemalans pay their taxes, we were able to induce them to change their behavior.

Changing Tax Rates

Behavioral economics argues that people do not necessarily make rational decisions based on self-interest. According to behavioral economics, irrational behavior and thinking can directly influence many of the decisions people make in their daily lives.

New Types of Economic Models and Economic Theories

Economic models and economic theories must also take into account the psychological and social factors that influence people's decisions.

The introduction of the concept of "homo economicus," which began to be questioned in the 1930s, brings a completely new perspective to this subject. It argues that behavioral economics, economics, and psychology should be considered together to identify the various variables that influence people's decision-making processes.

Founder of Behavioral Economics

The foundation of behavioral economics is found in The Theory of Moral Sentiments, published in 1759 by Adam Smith, the world's most famous classical economist and moral philosopher. In that study, Smith argued that human decision-making is influenced by both society and the desire to satisfy personal interests.

According to him, the primary determinant of a person's behavior is the desire to gain sympathy. In other words, according to Smith, people are social creatures, which leads to the desire for admiration, approval, and acceptance.

Concept Smith opened

The concept of behavioral economics, which Smith opened the door to, was not well defined at the time and for a long time was not accepted by many economists because they thought it was not well grounded enough to be incorporated into economic models.

Rational choice theory, especially that introduced by Lionel Robbins in the early 20th century, has become the foundation of mainstream economics. However, traces of the concept of behavioral economics were felt again in 1947.

Conclutios

In summary, behavioral economics is the field that studies why people sometimes make economically irrational decisions and what factors cause economic forecasts to be inconsistent with reality.