Importance Of Behavioural Economics

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Behavioural economics employs insights from psychology experiments to help explain examples of economically irrational behaviour, when dealing with consumer theory. The two most prominent ‘irrational’ preferences are reference dependence, and loss aversion. Although it is a fairly recent development, there have still been many papers written about behavioural economics; such as ‘On the Value of Incumbency: Managerial Reference Points and Loss Aversion,’ ‘The Forward-Looking Competitive Firm under Uncertainty,’ and ‘A Dynamic Model of Investment and Endogenous Growth.’ What connects the three of these papers is the focus of firm behaviour and how it affects firm production, as a result.
The first paper, ‘On the Value of Incumbency: Managerial
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It also considers that managers are bound by cognitive ability, and that affects how they perceive and react to different market conditions. Therefore, the question posed in this paper is why do production firms ‘irrational’ decisions, such as reference points and loss aversion, affect a firm’s entry and exit decisions, self-selection of entrants, and the market structure that emerges. Thus the proposed answer by Fershtman is that cognitive ability, reference points and tendency for loss aversion, of the firm’s managers, must be taken into account when discussing firm behaviour. Although this is valuable information, it is not necessarily surprising. It builds off the idea that not only are reference points and loss aversion tendencies the cause for firm’s irrational behaviour but the cognitive ability of the firm’s management is, as well. Therefore, it is comparable to others work, in the sense that it builds off it. The reasoning stands parallel to behavioural economics as Fershtman is advocating for another preference, cognitive …show more content…
Lence, and Dermot J. Hayes, and was published in the American Journal of Agricultural Economics, on May 1st, 1998. Since it is an Agricultural Economics Journal, it focuses on circumstances that are common in agriculture, such being the case that forward-looking risk-averse firms will produce more than risk-neutral ones and that a mean-pre-serving spread of distribution will increase risk-averse firm’s production. Lence and Hayes provide a set of behavioural hypothesis for said idea, which can be subjected to empirical testing. The paper uses the idea to help rationalize real-world facts that are incompatible with the standard model of the firm under uncertainty, such as sequential marketing, holding of output and/or input reserves, and short-run production at an expected loss. Therefore, the question posed in the paper asks why will risk-averse firms produce more than risk-neutral firms in the long run, with regards to agriculture? Lence and Hayes come to the conclusion that the results depend on firms realizing that prices of inputs in subsequent periods are correlated with output prices. To put it simply, if a firms runs a deficit one year trying to increase production or production efficiency, they will see the positive dividends in following years. Lence and Hayes main focus is on agriculture, and therefore they are trying to contribute

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