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NER2 - Summary
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Summary of NER2, course of the 4th year Strategy and Business Development minor
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SUMMARY – NEW ECONOMIC REALITIES 2 (NER2)Overview NER2:
- Part 1: Behavioural Economics for Dummies – Altman
- Part 2: Institutions and Economic Theory – Furubotn & Richter
- Part 3: Institutions – Douglass North
- Part 4: Understanding Institutional diversity – Elinor Ostrom
- Part 5: Institutions in Forest Management – Yaogi Zhang
- Part 6: The Three pillar model
- Part 7: Economic Determinants Causality Diagram
- Part 8: Extra info from Notes
Part 1: Behavioural Economics for Dummies – Altman
Chapter 2 – Getting real about assumptions
Behavioural Economics: the realism of assumption matter in a psychological, sociological,
and institutional way. It helps us better understand how people behave when making
decisions
- To explain and understand economic events
Conventional Economics: the realism of assumptions doesn’t matter. Prediction produced
by the model matter the most.
Economic model: simplification of the economic world that is designed to help us better
understand and explain various aspects of the economy.
- Are built upon simplifying assumptions
- Is supposed to be logically consistent (counts for behavioural and conventional
economics)
o E.g. you can assume that, in logically consistent fashion, selfish behaviour
increases a nation’s wealth under some circumstances and reduces a nation’s
wealth under other circumstances
, o Behavioural economists often challenge how conventional economic models
are built
The 9 conventional (Neo Classical) assumptions
- and why they are not true for Behavioural economists
1. People’s preferences are stable and consistent
a. In reality, people’s preferences can change
b. E.g. People when they are younger do not save for retirement but when they
are older, they do want to save for retirement and regret not having done so
c. Economic models need to allow this change in behaviour
2. People are solitary decision makers
a. In reality, people’s decisions can be changed on social, historical, and
institutional context
b. People don’t live in a bubble and will be influenced
3. How people form preferences doesn’t matter
a. In reality, it does matter how people form preferences, knowing what the
preferences are, and how preferences are formed can help economists
understand why preferences differ per person and why preferences change
4. People have the same preferences
a. Neo Classical economists assumes people are all the same, this is called the
representative agent model.
i. But this fails to provide a sound basis for rigorous economic models.
b. In reality, preferences may not only differ but also conflicting
c. Black box of the household: assumes that all members of a household are
identical and that one person’s preferences has preferences that represent the
preferences of everybody else in the household (the wife and children, for
example). Assumes that only one person in the household makes the decision.
d. Black-box of the firm: the simplifying assumption is that the firm acts as one
to maximize profits and productivity
, i. Principal-agent problem: the agent is delegated to act on behalf of
the principal. But the agent may not naturally do what the principal
wants (Hidden info & Hidden action)
5. People are all maximisers
a. In reality, we are all satisfiers, we don’t have the capacity to maximize given
the neurological, psychological, and environmental constrains but we do the
best we can, this is satisficing behaviour
b. Satisficing behaviour often produce better results than maximizing behaviour
c. People set out to maximize – and actually succeed in maximizing – their
individual level of material well-being
d. Firms maximize their profits and maximize their costs through the decisions
and resulting action of owners, managers, and workers
6. People have perfect knowledge
a. Alternative opportunities that are relevant to the decisions they make
(unbounded rationality) in reality people don’t have time and resources to
obtain this type of information so they make satisficing decisions based on
more limited information
b. How their decisions will affect the future, in reality people can only make
educated guesses based in imperfect information
c. How they’ll think and feel in the future, neo classical economists assumes that
people’s opinions don’t change when they get older
d. In reality you change opinions as you get older like the hippies did in the
1960s
7. People have unbounded computational capabilities
a. Neoclassical economists assume that people are able to do a multiplicity of
computations to arrive at decisions that meet their needs in the best way
possible
b. In reality, people don’t have the knowledge to do such calculations and relay
on bounded rationality
8. People have willpower
a. It assumes that the choices you make are the things you really want
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