Aula de inglês: Ch4:03 Economics: Behavioral Economics

Read the following passage. Then fill in the diagram with the information that you read.

Behavioral economics is a field that attempts to understand how consumers make choices that affect the marketplace. It began in the classical period (1776-1870). At this time, the field of economics was closely tied to the field of psychology. During this era, economists were deeply interested in what drove particular consumers to make particular decisions. These choices, behavioral economists believed, were closely tied to how much utility a person derived from making them.

Behavioral economics rests upon a few key assumptions. First, it dictates that individuals will be rational in their decision-making process. This does not necessarily mean that they will make a choice that is economically beneficial to them. Instead, behavioral economics asserts that people will make a decision that will result in some perceived increase in utility. For instance, many people often give to charity. In purely material terms, they are not making a sound economic choice. There is little physical benefit they receive in exchange. However, by giving to charity, consumers may feel more satisfied with themselves. In turn, they experience an overall increase in utility.

Second, behavioral economists recognize that people make choices based upon how certain situations or products are framed. In economic terms, framing refers to the way products are phrased or explained to consumers. For example, the painkiller aspirin was once used only for headache relief. As time went on, pharmaceutical companies realized that aspirin could be used for other painful ailments. Through successful framing of aspirin's additional benefits, companies were able to increase their customers' utility. As a result, aspirin sales rose significantly. Thus, framing can have a major influence over buying behavior when it appeals to consumers' concepts of utility.

Finally, behavioral economists are forced to recognize non-rational decisions by consumers. Non-rational decisions result from a miscalculation in a particular situation. Most misperceptions are attributed to social psychology. This is where a crowd misinterprets particular elements of an object or situation. For example, many feel that an increase in wealth always leads to an increase in utility. However, studies have proven that while increasing wealth can increase utility up to a certain level, eventually people reach a point when wealth no longer matters as much. In this case, the utility from making more money quickly diminishes. Despite this proven fact, many people continue to believe that more money will bring increased happiness. These beliefs affect the choices they make in their daily lives.

Both rational and nonrational factors may influence an individual's decisions. Thus, behavioral economics is a complicated and sometimes unpredictable field. It is nearly impossible to evaluate every variable that determines a single individual's choice. However, behavioral economists focus on much larger groups. By spotting trends in larger groups of people, behavioral economists can help businesses. With an understanding of particular patterns in consumer behavior, businesses can adjust their advertising, pricing, or production models to maximize sales. At one time, behavioral economics was disregarded by most economists. They thought it too abstract and dynamic to be worthwhile. The field has become more popular in the last several years, however, and continues to grow.

psychology: the study of the human mind and its effect on behavior  utility: a measure of happiness or satisfaction charity: an organization that collects money and organizes other voluntary help for people in need sound: worthwhile or justified ailment: an illness diminish: to become less dynamic: characterized by constant change or transformation

Behavioral Economics

Topic	Aspects
	1
	2
	3

1. Why does the author mention charity in paragraph 2?

(A) To explain the role of charity in economic decisions

(B) To explain that rational individuals tend to act in ways that bring little material benefit

(C) To explain that material benefit is the main determinant of rationality 

(D) To explain how choices can be rational without having material benefit

2. The author discusses aspirin in paragraph 3 in order to 

(A) reveal the rationality of the pharmaceutical companies

(B) provide an example of how businesses can present a product

(C) show that not all rational decisions are the best economic choice

(D) give an example of how consumers can lead the framing process

3. The author discusses increased wealth in paragraph 4 in order to

(A) exemplify some people's refusal to acknowledge economics

(B) point out that rational decisions are not always the best ones

(C) argue that rationality is often misinterpreted

(D) show that individuals may not always act rationally

Fill in the blanks to complete the summary.

Behavioral economics seeks to explain how and why consumers make certain decisions. It was originally closely tied to the field of _____________ and attempts to analyze consumer behavior. Behavioral economics acknowledges that consumers are rational in their decisions, although those decisions may not be economically _____________ . For example, many people give money to _____________  although they do not benefit materially from it. Also, people make choices based on how certain situations or products are framed. For instance, companies changed the framing of aspirin once it was found to ease a variety of _____________ . In addition, consumers sometimes make irrational decisions based on misperceptions, such as the belief that making more money increases happiness. The reality is that once a certain level of wealth is reached, the amount of happiness felt from earning more money _____________ .