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Behaviour in Economics - Part 1

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Subject Content.
From the (economist's ) armchair.
To the (psychologist's) couch.
Most neoclassical economic theory "a priori".
"A rational person behaves as follows.."
"How do markets populated by rational traders behave?"
This subject inhernetly empirical.
"How do actual people behave?"
"How do actual markets behave?"
Putting economics in the couch.
Just how "rational" is economics?
(General conclusion: not very!)
Non-mainstream economics.
Rejects neocalssical economics and finance.
Provides analytic alternatives based on non-neoclassical economists Minsky, Augusto Graziani, Richard Goodwin, Keynes, Schumpeter, Marx.
Unusual resources.
Blog www.debtdeflation.com/blogs as well as vUWS.

Key issue: How did the "Global Financial Cruisi" occur? Economy went from apparent tranquility ("The Great Moderation")...
To sudden breakdown - "The Great REcession".
We'll build a model of this by end of this subject.
Next slide starts lectures proper: behaviour in economics.
"A priori" economic notions about behaviour.
Micro - Consumers maximise utility subject to budget.
Firms maximise profits subject to demand.
Markets converge to supply=demand equilibrium.
Macro.
Agents in economy have "rational expectations".
Economy in "rational expectations equilibrium".
Finance.
Investors maximise expected returns subject to investment opportunities.
Asset market prices reflect corectly anticipated doscounted future cash flows.
Theorising about rationality in other disciplines very different.
Analyse actual behavior.
Build theories of mind that replicate observed behaviour.
No a priori tagging of observed behaviour as "rational" or "irrational".
Empirical research generally finds economic a priori model does not fit actual behaviour.
So most people are "irrational"?
Or is the economic definition of "rational" wrong?
Re-capping standard economic theory - firstly, demand.
Consumers assumed to be "rational utility maximisers".
"Rational" consumer assumed to obey these rules:
("Axioms of Revealed Preference", first developed by Paul Samuelson).
"Completeness".
Given any 2 bundles of commodities A & B, consumer can decide whether prefers A to B ((A > B), B ot A (B> A), or is indifferent between them (B+A).
"Transitivity".
If (A > B) and (B > C) then (A > C).
"Non-satiation".
More is preferred to less.
"Convexity".
Upsot: consumer's prefereneces can be represented by a utility surface:
"Indifference curves".
Each curve joins points that give consumer equal satisfaction.
All points on higher curve give more satisfaction than on lower.
More is always better.
Initial objections to (Samuelson 1938: "A Note on the Pure Theory of Consumer's Behaviour") theory
Indifference curves unobservable.
Shouldn't base science on unobservable entities.
Samuelson's solution: theory of "revealed preference" (Samuelson 1948 "Consumption Theory in Terms of Revealed Preference").
Indifference curves can be inferred from observed behavior.
Simplest instance: more is preferred to less so..
Rational consumer must prefer any combination in box above A to A itself:
More complicated: If offered choice between A and B when both are affordable and chooses A, then A must lie on higher indifference curve than B.
Can infer indifference map from actual choices.
Not "non-observable" after all.
Next stage: derving rational consumer's demand function from indifference map:
The "Law of Demand" Consumption of a good rises as its price falls.
One problem: some goods can be so undesirable that consumption falls as price falls.
"Giffen goods" (potatoes in Ireland during famine).