Former classic economic theories mainly strengthened the concept of the ‘homo economicus’, who strongly behaves economical and rational. Nowadays however, some argue this supports not the reality, and so academic research progressed. For this, laureate Kahneman et al developed the prospect theory which is assumed to describe people’s economical behaviour better than traditional theories.
Therefore the essay elaborates on the concept of behavioural finance and econom-ics as well as it checks, whether the homo economicus has mutated to this. How-ever, although there is criticism, the hypothesis is humans are bounded rational and therefore only conditioned able to be described as homo economicus.
To gain insight, a brief introduction on theory, homo economicus and recent ob-servations of efficiency in human action and rationality is given. Later the concept of behavioural finance and economics is brought in and findings in human behav-iour are discussed together with examples from heuristics, economical framing and anomalies. Finally, an assessment of essay and hypothesis sums all up.
Table of Contents
1 Introduction and academic method
2 Classical theory in the context of new findings
2.1 The evolution of an idea
2.2 Basic observations and methods
3 A new succeeding concept
3.1 Behavioural finance and economics
3.2 Critics on behavioural finance and economics
4 Prospect theory: main findings in human behaviour
4.1 Heuristics
4.1.1 Loss aversion
4.1.2 Gambler's fallacy
4.1.3 Self-serving bias / Self-attribution Bias
4.2 Framing (economics)
4.2.1 Mental accounting
4.2.2 Anchoring
4.3 Anomalies
4.3.1 Endowment effect & status quo bias
4.3.2 Life cycle & inter-temporal consumption
4.3.3 Overoptimism & wishful thinking
5 Conclusion and assessment of the hypothesis
Objectives and Scope
The primary objective of this work is to examine whether the traditional concept of the 'homo economicus' remains valid or whether it has evolved into the field of behavioural finance and economics. The research investigates the validity of the rational agent model in light of modern psychological findings, focusing on systematic human deviations from rational economic behavior.
- The theoretical transition from classical economic models to behavioural finance.
- Empirical observations regarding cognitive biases and heuristics.
- The impact of framing and mental accounting on economic decision-making.
- An analysis of market anomalies and their implications for the homo economicus model.
- The role of evolutionary psychology and bounded rationality in human behavior.
Excerpt from the Book
4.1.2 Gambler's fallacy
Humans tend to evaluate and reason probabilities and chances constantly wrong, which is considered to be a logical fallacy. And therefore, e.g. the gambler’s fallacy is one of many misunderstandings which arise in everyday life. For scientists, this fallacy is a cognitive bias that is produced by a psychological heuristic which is called the ‘representativeness heuristic’.
And although it could be applied to any form of gambling, it is easiest to illustrate the gambler’s fallacy by considering coin-tossing. Usually humans believe that if a flipped coin came, say, three times in a row with the number up, it is now more likely not to do so again. Similarly, just because a stocks / goods market has gone up or down for a while does not mean, it now is going the other way soon.
Anyway, back to the example: The gambler's fallacy could be illustrated by a little example in which a coin is tossed again and again. As a precondition one has to suppose that the coin is fair and the chance to come up with a head is exactly fifty-fifty. Then the chance to come up heads twice after another is 0.5 times 0.5, which one fourth and three times would be one eighth.
Hence if a coin is flipped 20 times and comes up with the head every time. What is the probability it will come up with the number the next time? Of course 0.5, as seen above. In real life, however, if a coin is tossed 20 times and the result always is heads, it is far more likely that there is something wrong with the coin than the game is honest. And not only people who belief in the concept of the homo economicus would argue that it is far more likely that coin is manipulated, than that the initial premise is correct and the next toss will be fifty-fifty for heads.
Summary of Chapters
1 Introduction and academic method: This chapter outlines the scope of the study, introducing the concept of the 'homo economicus' and the rationale for shifting toward behavioural finance.
2 Classical theory in the context of new findings: The chapter explores the historical evolution of economic thought and the drift away from psychology in traditional models, setting the stage for contemporary behavioral research.
3 A new succeeding concept: This section defines behavioural finance and economics as a modern field that integrates psychological insights to improve the realism of standard economic theories.
4 Prospect theory: main findings in human behaviour: This central chapter details the empirical findings regarding heuristics, framing, and anomalies, providing evidence for bounded rationality.
5 Conclusion and assessment of the hypothesis: The final chapter summarizes the findings and evaluates the hypothesis, concluding that while the homo economicus model has been challenged, it serves as a limited ideal compared to the observed reality of human decision-making.
Keywords
Homo economicus, behavioural finance, behavioural economics, prospect theory, heuristics, framing, mental accounting, loss aversion, gambler's fallacy, status quo bias, bounded rationality, cognitive biases, market anomalies, decision making, rationality.
Frequently Asked Questions
What is the primary focus of this work?
The work investigates the validity of the 'homo economicus' model in modern economic theory, specifically examining how psychological research challenges the assumption of perfect human rationality.
What are the main thematic areas covered?
The study centers on heuristics, economic framing, and market anomalies as the three pillars of behavioural finance and economics.
What is the core research question?
The research asks whether the 'homo economicus' has mutated into, or has been replaced by, the conceptual framework of behavioural finance and economics.
Which methodology is employed in the study?
The author utilizes a descriptive analysis of existing academic literature, behavioral research, and historical economic data to contrast traditional models with findings from prospect theory.
What does the main body address?
The main body systematically explores how individuals deviate from expected rational behavior through specific biases like loss aversion, mental accounting, and the gambler's fallacy.
What are the key terms that define the research?
The research is defined by terms such as bounded rationality, cognitive biases, prospect theory, and market efficiency.
How does mental accounting contradict standard economic theory?
It contradicts the idea of perfectly integrated financial decision-making by showing that people tend to categorize assets into separate, non-fungible mental accounts.
Why are market anomalies significant for this study?
Anomalies serve as empirical evidence that financial markets do not always reach rational outcomes, thereby challenging the efficient-market hypothesis.
- Citar trabajo
- Michael A. Braun (Autor), 2006, Did the ‘homo economicus’ mutate to the concept of behavioural finance and economics?, Múnich, GRIN Verlag, https://www.grin.com/document/60829
