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How Do Economic Agents Behave? Essay Example

Pages: 7

Words: 1836

Essay

Introduction

In analyzing the behavior of economic agents, economics cite rationality as the basic assumption that explains that, well knowledgeable people on potential outcomes are best suited in making consistent as well as logical choices that are likely to maximize utility. The opponents of rationality however argue that, the economic agents are at times associated with irrational behavior and lack the necessary awareness of possible effects. According to the rational choice theory, any rational choice is attributed to reason and maximization of utility is believed to be the ultimate objective. For any behavior to be considered as rational there is need for the justification of the premise leading to the drawing of the most suitable conclusion (Nowak, 2006). The rational economic agents are able to maximize utility through articulate planning of the future through making good choices at present. Any dynamic and inter-temporal thinking economic agent is able to attribute utility to present as well as future satisfaction. It is therefore prudent to sacrifice today for the sake of benefiting in the future.

Economic agents are also called economic actors and their behavior in most cases is based on rationality. These are the people as well as organizations that take active participation in the four economic activities that are considered essential for the survival of the business. The essential activities in this regard entail the processes of production, distribution, consumption as well as maintenance of resources in the business (Dasgupta, 2007). Economic agents therefore could be individual people, small groups of people comprising of a group of roommates or family members and might also be a large organization including multinational corporations or government agencies. Based on economics, these agents may assume a certain trend of behavior as well as interaction in the course of engagement in their economic activities. This paper attempts to critically analyze the behavior that is associated with economic agents through exploration of contemporary research in this field as well as a comparison with other approaches. The game theory, behavioral economics, artificial intelligence as well as the decision theory as applicable in economics has also been quoted in the explanation of the rational economic agent

Economics as a branch of social science

The behavior of economic agents is best explained by the fact that, economics is a branch of social science that deals with the behavior of people in regard to meeting the needs as well as enhancing individual well-being. As a consequent, the economic behaviors are closely linked with human behavior. Is some cases however, there are institutional forces that tend to influence this trend of behavior such as the overtime expansion in bureaucracies. All the same, a close analysis of economic outcomes reveals that they are determined by the human decisions as well as behaviors (Ariely, 2010). In this regard therefore, economists have a good starting point that entails the statement concerning the motivations that shape economic actions.

The human motivation coupled with the human nature was the basis of the mixing of the self interest of an individual with the social motives. Instead of merely arriving at assumptions concerning the human behavior, behavioral economics is based on scientific experiments that leads to the determination of the different trends in behavior based on prevailing situation. Writers and philosophers have deeply explored the probable conflict that exists between human reasoning and emotions. Conventionally, the perception is that emotions usually intrude in the path of coherent decision making and thus interfere with the process of logical reasoning. Intelligent people must therefore have the right skills of controlling emotions through the use of reason (Ariely, 2010). It therefore implies that, overreliance on emotions in the course of decision making in economics is a possible cause of irrational behavior (Ariely, 2010). A nuanced reality has however been suggested in behavioral economics through research. The decisions that are made in an environment of logical reasoning are not at all times ‘better’ compared to the decisions that are based on intuition or even emotions. According to the research in this area, reasoning can be extremely effective when it is applicable in making of economic decisions that are relatively simple. But if the decisions are extremely complex, then there is a possibility for being overwhelmed by the quantity of information that is available (Nowak, 2006).

Economic agents try to choose suitable goals and attempts to achieve them. From there, it is prudent to proceed from the perception that, individuals have the necessary freedom of choice of goals that they find most suitable. The goals that are chosen may be completely distinct when compared to the goals that other people have set but this does not change the situation. Any goal that is considered as rational however must be associated with a limit and more so after taking in to account that people usually set a number of final goals. Some of the goals that are set by some people could be practically unattainable. Some people are keen to choose goals that are practically reasonable and achievable but they may drift away from their achievement due to their engagement in irrational behaviors that hinders the achievements of the good goals (Ariely, 2010). A rational behavior may be associated with the following features.

  1. The goals selected is perfectly consistent with the present as well as the future well being

  2. The selected goal is pursued in a way that is likely to lead to successful achievement of the goal.

An important point of consideration in the behavior of economic agents is that making economic decision is subject to potential constraints such as limits posed by the level of income as well as other types of resources as well as the intellectual and physical capabilities (Lorrin, et al., 2006). Time is the greatest and universal constraint in this regard. The allocation of the available 24 hours every day among the major and competing activities may be a difficult task among many people. The total time available for allocation of all activities is 24 and allocating a cumulative 25 hours per day is not possible. The production possibilities frontier is composed of a maximum of 24 hours every day. Secondly, information is an equally crucial factor in rationality. In the assessment of available options to the economic agents, the available information is put in best use while at the same time additional information is also collected. Considering a decision of purchasing a new car, the decision will be based on a number of factors. Is it prudent to buy a new car or a second hand car? The relative importance attached to the fuel economy must also be accounted for, in addition to the luxury features as well as the level of safety. The resale value and the cost of maintenance must also be considered. A rational decision must therefore be made after collecting sufficient information regarding factors such as the ones highlighted here (Dasgupta, 2007).

Conclusion

Based on available economic models, it is generally assumed that, the behavior of economic agents is generally rational with the intent of utility maximization. Experiments in economic research have strived to prove the assumption with the use of laboratory tests under artificial circumstances. It is important to consider a careful interpretation of experiment results because in most cases, the laboratory cannot fully reflect the reality (Dasgupta, 2007). On the contrary, the use of internet auctions may offer an opportunity of realizing the actual behavior that is associated with economic agents in comparison with the available theoretical anticipations. E-bay auctions is a market leader that has analyzed the different patterns of behaviors among different people at individual level as well as a a group. This is conventionally the theoretical expectation. After a close assessment, a significant number of supposedly irrational individuals can be explained based on rational behavior.

The game theory, artificial intelligence as well as the decision theory as applicable in economics explains the rational economic agent as one with clear preferences, uncertainty models through anticipated values of the functions as well as variables and makes the choice of undertaking an action that is associated with optimal anticipated outcome based on a selection from other feasible actions. A rational economic agent is any person, machine, software or firm that is capable of making decisions and other field such as ethics, philosophy and cognitive science has expressed interests in rational economic agents.

References

Ariely, D., (2010). Predictably Irrational: The Hidden Forces That Shape Our Decisions. New York: Harper Perennial.

Dasgupta P. (2007). Economics: a very short introduction Oxford, UK: Oxford University Press

Greif A. 2006Institutions and the path to the modern economy: lessons from medieval trade New York, NY: Cambridge University Press.

Lorrin M. K., et al., (2006). “Estimated Prevalence of Compulsive Buying Behavior in the United States,” American Journal of Psychiatry, 163 1806–1812.

Nowak, M. A., (2006). Evolutionary dynamics: exploring the equations of life Cambridge, MA: The Belkamps Press.

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