Summary
The implementation of economic policies in the countries means the most visible way in which governments intervene in the functioning of the free market to direct its disturbances to the lowest possible levels and thus ensure that the participation of individuals and companies is as inclusive as possible..
However, the formulation of policies suggests that individuals change certain patterns of behavior so that the expected results are achieved and in most cases these results are not achieved, partly because the agents do not adjust to the particularities of the rigorous prediction models.
Most of these models suggest a perfect and ideal behavior that escapes the attitudes of people in their daily lives, this document constitutes an approach to this behavior through individual decisions, exploring the classic assumption of rationality and contrasting this the role of the impulses that are based on the neuronal activity of the brain and which is defined as neuroeconomics.
Abstract
Economic policies in countries is the most visible instrument that governments has to control the operation in markets to guide their disturbance to the lowest possible levels and ensure the participation of individuals and enterprises as inclusive as possible.
However, the policy suggests that individuals change certain patterns of behavior to achieve the desired results. In several cases these are not achieved because agents do not conform to the particularities of the rigorous predictive models.
Most of these models suggests a perfect and ideal behavior which escapes to the attitudes of people daily. This paper studies how people take decisions exploring the classical assumption of rationality and contrasting this with the role of the impulses which are generated by neuronal activity in the brain and is defined as neuroeconomics.
1. General criteria on decision theory
The fundamental edge that supports the economic analysis is the way in which the agents are of consumption or production make decisions that allow them to compensate their needs with the availability of resources to be able to satisfy them. The key to this link is to assume the condition of unlimited personal needs in order to establish priorities and thus prioritize which desires are those that must be initially resolved. This is strictly called the optimization of resources in the face of relative scarcity.
Mankiw (2009), establishes which are the principles that govern in the framework of classical economics so that the agents fulfill the aforementioned hierarchical mental process:
- People face trade-offs. The cost of a thing is what you give up in order to get it. Rational individuals think in marginal terms. Individuals respond to incentives.
These principles link key aspects that are taken into account when choosing, as follows:
- The dilemma is synonymous with scarcity Cost is the evaluation of alternatives (all attractive) to have a formal decision criterion Rationality implies that human beings learn from their past mistakes (Muth, 1961) and are capable of making inferences about behavior future results so that when they form expectations of the possible results of their decisions, they take into account past results and the level of possibility that these will occur again.Incentives are aspects of the environment (offers, events of nature, advertising pieces, comments from friends, etc.) that help or influence the final decision.
But how do agents know that their expectations are correctly formed? Mankiw et al. (2009) propose the following scheme:
- Be transitive. For example, if we prefer soft drinks instead of alcoholic beverages and in turn we prefer juices instead of soft drinks, then the juices will always be preferred by that consumer. Being convex, this implies that the consumer has a limitation to choose and that is their budget. So to have more of everything, you must organize your wishes correctly. Continuity, this means that for any level of expenses there is always a supply of products and services that can be purchased.
The question at this level is, do individuals really choose by rationality, that is, learning from "past mistakes" or is their decision a purely random process, that is, do they allow themselves to be carried away by "hunches" or impulses?
1.1. The decision according to rational expectations
Garnica (nn) establishes that the foundation of this model is the ability of agents to be able to formulate future scenarios based on past experiences and the availability of information in present time that allows them to visualize said scenarios in the future. Under this vision, the role of third parties to influence the final decision is minimal since the possibility of balancing any externality in the markets lies in the same agents, who, endowed with a high level of criticality and analysis, are capable of channeling the economy towards the perpetual balance. That is, with production levels close to full employment and variations in very stable price levels; so the effect of loss of purchasing power tempered by fluctuations in inflation is minimal.
According to Simón (1977), rationality suggests that individuals adjust their behavior to an integrated system that is made up of 3 edges: 1) fully see the set of alternatives to make possible decisions, 2) consider the total of possible results from the universe of possible solutions and 3) decision-making by one that minimizes the risk of personal loss or damage. However, Simón et al. (1977) establishes that none of the 3 edges are possible to be achieved in practice, since generally people do not usually consider (or at least do not have complete information) all the possible alternatives and results that their decisions may derive. And in the case of the results, these are estimated with high levels of error. Camerer and Lovallo (1999) define 6 reasons why this occurs:
- Overconfidence bias, the same one that refers to the human being's tendency to make up their future positively Confirmation bias, which refers to the tendency to hold only that information that supports our hypothesis Information damnation, refers to having abundant Data that turn out to be too few to make strongly sustainable and sustainable decisions. Endowment effect bias is associated with the individual belief that other people are willing to pay more for something that the same company would not pay. Risk effect, meaning that agents value a loss more rigorously than a gain of the same magnitude.
Thus, the field of limited rationality is reached, which starts from the questioning of the ability to formulate scenarios that collect all possible results. Simón (1997) determines that the limited capacity to acquire knowledge of the human being and then process it and predict behaviors is the low point of the assumption of rationality in neoclassical models, so that entrepreneurs do not get to establish optimal decision criteria, they only they set goals in which they end up putting a lot of affection combined with a small dose of objectivity.
1.2. The decision according to impulse
Impulse-measured behavior enters the field of neuroscience. According to Camerer & Loewenstein & Prelec (2005), neuroscience uses images of brain activity and other techniques typical of medicine and psychology to infer how the brain works when faced with stimuli. Through these studies, it has been possible to establish that brain activity follows cognitive and affective patterns in decision-making. Zajoncs (1998) goes further and mentions that individuals relate affects with states of feelings and states of affect are caused by feelings, seen from this way it can be concluded that human behavior, whatever the field where it develops, is strongly influenced by the emotional and affective.
Indeed, Camerer & Loewenstein & Prelec et al. (2005) in their research on emotional regulation shows that before carrying out cognitive tasks in the brain, affect first appears, then it is controlled depending on the individual's ability to control their emotions. However, Baumeister & Vohs (2003) managed to show that decision-making can weaken willpower.
Taking into account these antecedents, the name of neuroeconomics is formulated to the branch of neuroscience focused on studying the economic behavior of agents after the decision-making process aimed at minimizing the effects of scarcity. Neuroeconomics can be approached from 4 themes belonging to conventional economics:
- Intertemporal choice Low-risk decision-making Game theory Labor market
Neuroeconomics suggests that the decision-making process consists first in the identification and definition of the problem, then alternatives are sought, continues with the evaluation and finally it is executed and controlled. However, as in a real problem the variables, restrictions, actors and behaviors are not very difficult to model (if not impossible), it is suggested to classify individual decisions based on the degree of knowledge as proposed by Turban & Meredith (1994), So:
- Complete Information, occurs when the agent knows and masters all the variables so that the results obtained are easily known. Partial Information, occurs when the agent knows and masters certain variables that can lead to a wide range of alternatives. A little risk is added here since there are elements that are not known or mastered. For example, a driver who consumes alcohol while driving has 3 possible scenarios: Getting home safely, being stopped or getting injured by causing an accident. However, they all depend on whether there are road signs on your way home, a watchman appears, or you are driving in an uninhabited place.In any case, all scenarios are possible but the negative consequences tend to be valued with greater weight, so that the driver can choose not to drink alcohol or drink the least amount. Lack of information, a situation in which the agents are unable to estimate the occurrence of an event so that they usually always choose to minimize the loss since they are facing a new scenario.
According to Bhatt & Camerer (2005) neuroeconomics goes beyond neoclassical rationality, recovering the role of human emotions in the interactions of individuals with variables that under traditional economics assume patterns of linear relationships. Thus, for example, in labor matters, neoclassical theory establishes that it is necessary to introduce a certain flexibility in hiring systems to reduce the cost of production and thus be more competitive. With proper regulation, this can ensure that companies in this segment hire labor at lower prices, however,It generates instability in the hired workers who will feel less motivated to give their best because they perceive an undervaluation of their effort and then the effect of improvement in competitiveness via costs is absorbed by productivity as it does not take off satisfactorily for the employer.
Another example is the same hiring of personnel, when the person in charge of Human Talent of a company must decide between a professional completely awarded at an academic and work level and another person who is just beginning his work path or is even a friend of a senior manager of the company. business. Under this scenario, you end up choosing what is most convenient in terms of cost or a “known bad”. In a strict sense of rationality, the option that manages to generate greater savings in productivity for the firm should be chosen, as this is not verifiable from the start, then the one with the most experience should be chosen.
Loewenstein & O 'Donoghue (2004) and Naqvi, Shiv & Bechara (2006) determine that there is a great variety of stimuli that affect the decision-making systems identified in neuroeconomics: Affective and Deliberative. So the patterns of people's behavior in making decisions become so random that the extreme rationality assumptions of neoclassical economics do not fit reality.
2. Conclusions
In this document, two aspects of economic thought have been addressed under which the decision-making process of economic agents covers. Assuming that individuals and companies have unlimited sources of information and the ability to form assumptions and scenarios with certainty is too delusional, since human nature is always subject to crisis and that makes expectations about the immediate future unpredictable.
The perfect behaviors that real expectations imply are impractical in the daily life of people and companies because they have an affective-objective dilemma, in that sense they will always seek to achieve the best results with a more sentimental than technical predominance and those results are unrelated from the optimizing rigidity that neoclassical economics sets, since the agents' decisions are aligned with general goals that in most cases are not connected to a sense of extreme efficiency.
3. Bibliography
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