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The Standard Economic Model Has Been Significantly Improved by Consideration of Psychological Factors Which Challenge Its Assumptions

Essay by   •  February 19, 2012  •  Essay  •  253 Words (2 Pages)  •  2,046 Views

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In the modern real life, people will have great motivation to make rational decisions on their purchases. People also have chances to learn from theirs mistakes they were made then are afforded in the laboratory. In short, economists are questioning the external validity of those conditions.

The laboratory evidence offers little guidance as to the empirical magnitude of psychological effects. In natural way, these effects may be small in size compared to that of economic factors such as price. Since little testing of deviations from the rational choice model has taken place outside of the laboratory, it has remained difficult to directly address these criticisms. We can scale the impact of a given psychological feature on take-up by the impact of the interest rate on take-up and hence "price" the importance of that psychological feature. Specifically, suppose that some feature increases take up by x and a one point decrease in interest rate raises take up by y. Then the ratio X/Y large a change in interest rate is needed to produce the same size effect.

Indeed, we can scale the impact of a given psychological feature on take-up by the impact of the

interest rate on take-up and hence "price" the importance of that psychological feature. Specifically,

suppose that some feature increases take up by x and a one point decrease in interest rate raises

take up by y. Then the ratio

x

y

measures the market importance of this psychological feature: how

large a change in interest rate is needed to produce the same size effect.4

...

...

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