Behavioral Economics Versus Traditional Economics: Are They Very Different?

23 Pages Posted: 9 Apr 2019

See all articles by Kuo-Ping Chang

Kuo-Ping Chang

National Tsing Hua University - Department of Quantitative Finance

Date Written: January 10, 2019

Abstract

Behavioral economics, notably developed by Daniel Kahneman, Amos Tversky and Richard Thaler, has found consistent and pervasive anomalies in common people’s daily behaviors. This paper has employed the concepts in traditional economics (e.g., choice, relative price, and opportunity cost) to analyze the anomalies found in behavioral economics. The results show that quite a few anomalies, such as preference reversal, isolation effect and sunk cost fallacy, do not exist. This is not to say that people always make rational choices. The findings of the paper conclude, however, that common people may not be as irrational as behavioral economists have suggested (in some situations, common people may act more like a rational economist).

Keywords: Choice, sunk cost fallacy, relative price ratio (rate of return), prospect theory, endowment effect

JEL Classification: D9, D11

Suggested Citation

Chang, Kuo-Ping, Behavioral Economics Versus Traditional Economics: Are They Very Different? (January 10, 2019). Available at SSRN: https://ssrn.com/abstract=3350088 or http://dx.doi.org/10.2139/ssrn.3350088

Kuo-Ping Chang (Contact Author)

National Tsing Hua University - Department of Quantitative Finance ( email )

Hsin Chu, Taiwan 300
China
+886 3 574 2730 (Phone)
+886 3 571 5403 (Fax)

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