Abstract
The idea of the significance of the psychological dimension of human behavior is not new and has existed in the social sciences since ancient times. Accordingly, there is an endeavor to place economic analysis on the foundations of psychological research, which takes its form of expression in economic theory through the affirmation of behavioral economics. The aim of this chapter is to critically analyze various normative research programs in behavioral economics and to consider the importance of alternative concepts, models, and theories from the point of view of improving understanding of real economic and social behavior. The particular value of this chapter lies in affirming the importance of a program of behavioral economics known as new paternalism, which is based on challenging the concept of maximizing rationality and opens a new dimension of understanding the justification of state interference in the sphere of economy and society.
TopBackground
In the theoretical literature, the emergence of new analytical direction, by which the name behavioral economics has become “domesticated” and “consolidated”, has the status of one of the most interesting and significant events in economic science in recent decades. The ideas and approaches developed within behavioral economics quickly gained “academic recognition”. This allowed behavioral theory to partly penetrate into the economic mainstream, which, among other things, led to certain changes and transformations of some of its segments and parts. In the continuation of this chapter, the authors present behavioral ideas of Adam Smith, Robert Maltus, John Stuart Mill, and other “giants” of economic science who, through their theoretical considerations, determined the “path” of developing the behavioral economics as we know it today.
In The Theory of Moral Sentiments, Adam Smith, before writing The Wealth of Nations, dealt in detail, with what would today be considered psychological problems (feelings, pleasure, human nature). Although skilled in that kind of analysis, he did not see reason for explicit exposure of his view of human nature in The Wealth of Nations. Indeed, the impression is that Adam Smith considers people as they are. He had, mainly, acquired knowledge of human nature in Scotland and assumed that there was one “Scot” in each individual. It is quite natural that he believes that the constant and consistent driving of a man to make his position better is understandable in itself. This premise about human nature is a key feature Smith’s “system of natural freedom” (Smith, 1998).
Key Terms in this Chapter
Homo Economicus: Standard economic theory is based on a special kind of orgasm which we sometimes call homo economic. Members of that sort are always rational. As managers in factories, they maximize profits. As consumers, they maximize utility or, equivalently, choose the point on the highest indifference curve. With the limitations they face, they rationally measure all the costs and benefits and always choose the best course of action.
Behavioral Economics: Behavioral economics is an area of economic science where economists use basic understandings of psychology to explain the behavior of real economic actors.
Positive Testimonials: Positive testimonials are statements that describe the world as it is.
Cognitive Biases: Cognitive biases are manifested as systematic deviations from the results of thinking, judgment, reasoning, memory, and decision-making processes from normative standards.
Heuristics: Heuristics are simple mental strategies that we use to make our decisions.
Hard Paternalism: Hard paternalism implies the introduction of some direct bans, direct organizations, as well as high taxes and other government benefits to help real economic players make better and better decisions.
Normative Statements: Normative statements are statements that prescribe what the world should be like.
Prospect Theory: The descriptive theory of Amos Tversky and Daniel Kahneman describes and explains the choices of ordinary people.
Soft Paternalism: Soft paternalism means providing the necessary information or manipulating the architecture of choice in order to reduce or eliminate the irrationality of real business entities.