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Behavioral economics recognizes that people use System 1 to make decisions more often than they use System 2. Which of the following is an implication of that decision-making process?
A) A majority of decisions are not made according to the neoclassical assumption of rational behavior.
B) Most decisions are made following a careful calculation of costs and benefits.
C) Even though most decisions are irrational, the neoclassical model still accurately predicts outcomes.
D) System 1 is best at making optimal decisions.
Neoclassical Assumption
A perspective in economics that assumes individuals have rational preferences, markets are capable of reaching equilibrium, and information is symmetrically distributed.
System 1
A term often used in psychology and behavioral economics, referring to the brain's fast, automatic, and intuitive approach to decision-making.
Rational Behavior
Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility.
- Understand the principles of behavioral economics and its distinction from neoclassical economics.
- Identify and explain the roles of System 1 and System 2 in decision-making processes.
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Learning Objectives
- Understand the principles of behavioral economics and its distinction from neoclassical economics.
- Identify and explain the roles of System 1 and System 2 in decision-making processes.
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