Traditional or behavioral?
Traditional economists also assume human beings have complete self-control. But, for instance, people will buy cigarettes by the pack instead of the carton even though the carton saves them money, to eep usage down. They purchase locks for their refrigerators and overpay on taxes to force themselves to save. In other words, We protect ourselves from our worst temptations but pay a price to do so. My behavioral economists are responding to this is by setting up ways for people to keep themselves free of these temptations. This includes what are called \"nudges" toward more rational behavior rather than mandatory regulations from government. For example, up to 20 percent of new employees do not enroll in retirement savings plans immediately, because of procrastination or feeling overwhelmed by the different choices. Some companies are now moving to a new system, where employees are automatically enrolled unless they \"opt out." Almost no-one opts out in this program and employees begin saving at the early years, which are most critical for retirement. Another area that seems illogical is the idea of mental W putting dollars in different mental categories where they take different values. Economists typically consider dollars to be funglble, or having equal value to the individual, regardless of the situation. Youlmlght, for instance, think of the $25 you found In the street differently from the $25 you earned from three hours working in a fast food restaurant. The street money might well be treated as \"mad money" with little rational regard to getting the best value. This is in one sense strange, since it is still equivalent to three hours of hard work in the restau rant. Yet the \"easy come-easy go\" mentality replaces the rational economizer because of the situation, or context, in which the money was attained. in another example of mental vaccounting that seems inconsistent to a traditional economist, a person could carry a credit card debt of 51,000 that has a 15% yearly interest cost, and simultaneously have a $2,000 savings account that pays only 2% per year. That means she pays $150 a year to the credit card company, while collecting only $40 annually in bank interest, so she loses $130 a year. That doesn't seem wise. The \"rational\" decision would be to pay off the debt, since a $1,000 savings account with S0 in debt is the equivalent net worth, and she would now net $20 per year. But curiously, it is not uncommon for people to ignore this advice, since they will treat a loss to their savings account as higher than the benefit of paying off their credit card. The dollars are not being treated as m so it looks irrational to traditional economists. Which view is right, the behavioral econ omisls' or the traditional view? Both have their advantages, but behavioral economists have at least shed a light on trying to describe and explain behavior that has historically been dismissed as irrational. If most of us are engaged in some "irrationalbehavlor," perhaps there are deeper underlying reasons for this behavior in the rst place
