Behavioral Economics: Correcting a Problem Economics Does Not Have
<p>Foster turns his attention to the field of Behavioral Economics that gained a lot of attention in the early 2000’s. However, it is clear Foster is unimpressed.</p>
<p>Two psychologists kicked the field off, <a href="https://www.investopedia.com/terms/d/daniel-kahneman.asp" rel="noopener ugc nofollow" target="_blank">Daniel Kahneman</a> and <a href="https://thedecisionlab.com/thinkers/economics/amos-tversky" rel="noopener ugc nofollow" target="_blank">Amos Tversky</a>. Their early work in 1979 covered <a href="https://www.investopedia.com/terms/p/prospecttheory.asp" rel="noopener ugc nofollow" target="_blank">prospect theory</a>, which observed people being more risk averse about losses than they should be if they were rationally following probabilities.</p>
<p>Essentially, we hate losing something we have more than gaining the same amount of something.</p>
<p>They worked together starting in the 1960s up until Tversky died in 1996. Their work earned the <a href="https://www.nobelprize.org/prizes/economic-sciences/2002/kahneman/biographical/" rel="noopener ugc nofollow" target="_blank">2002 Nobel Prize</a>, but since the awards are not given posthumously, only Kahneman received it.</p>
<p>However, it seems if Foster was voting that year, he would not have awarded it to their work. He notes the idea that people care more about losses than gains is already built into economic theory.</p>
<p>The <a href="https://www.investopedia.com/ask/answers/013015/what-does-law-diminishing-marginal-utility-explain.asp#:~:text=Key%20Takeaways-,The%20law%20of%20diminishing%20marginal%20utility%20explains%20that%20as%20a,toward%20a%20less%20valuable%20use." rel="noopener ugc nofollow" target="_blank">law of diminishing marginal utility</a> is why demand curves are downward sloping, that is, quantity demanded increases as prices fall.</p>
<p>In English: you enjoy the first unit of something more than the second. Therefore, you are willing to pay more for the first than the second.</p>
<p>If you are really hungry, you might be willing to pay $2 for your first donut. If you had to pay for the second one, $2 may seem like too much, but maybe you would pay $1. Since you get less enjoyment from the second one (diminishing marginal utility) you will only buy more if you can pay less (downward sloping demand curve.)</p>
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