Introduction
As we delve deeper into the intricate world of economics, it becomes evident that people are far from the perfectly rational beings we frequently imagine them to be. Instead, we are emotional beings with biases and inconsistencies that significantly impact our economic decisions. Economists must consider these human tendencies while developing economic models.
The Human Behaviors Economists Should Observe for Creating Economic Models
Minimum Satisfaction vs. Optimization
People often tend to settle for solutions that meet their minimum requirements rather than striving for the optimal solution. As Herbert Simon suggested, humans are more like “satisfiers” than rational maximizers. In other words, we make decisions that are satisfactory rather than optimal. This tendency can be seen in everyday life when people make purchasing decisions, for example. Instead of spending hours researching the best product on the market, we often choose the first product that meets our basic needs and preferences.
Fairness
Another important behavior to consider is humans’ innate sense of fairness. As demonstrated by the ultimatum game, people may reject offers perceived as unfair, even if it means sacrificing their self-interest (Mankiw, 2021). This sense of fairness can also come into play in labor markets, where perceived unfairness in wages can lead to reduced effort or even strikes.
Inconsistency
Additionally, humans exhibit inconsistency over time. It is common for us to delay and not follow through with our plans, as seen in the consumption-saving decision. People may make plans for themselves but fail to follow through due to the desire for instant gratification (Mankiw, 2021). Retirement accounts like 401(k) plans help to protect people from their desires for instant gratification by locking up their money before they can spend it.
Conclusion
It is critical for economists to incorporate these human behaviors while developing economic models. By doing so, we can better understand and predict economic phenomena and ultimately design policies and strategies that benefit society as a whole.
Reference
Mankiw, N. G. (2021). Chapter 22: Frontiers of Microeconomics: 22-2 Political Economy. In K. Brown (Ed.), Principles of Economics. Cengage Learning.