Most “old school” economists felt that a sound knowledge in economics would lead to good financial choices being made, but as we can see from the U.S. sub–prime mortgage issues, this is not typically the case, and there is now an emerging concept called Behavioural Economics to explain this situation.
For example, every New Year, many of us make resolutions to exercise more and to maintain a healthy weight. We KNOW from medical research that regular exercise and maintaining a healthy weight will lead to a longer life but what we actually DO does not always align with what we inherently KNOW is good for us. At the beginning of a New Year, we tend to be more determined to make positive changes but a few months into the year, many of us find ourselves gravitating back to our old familiar habits.
Behavioural Economics is based on the premise that people are not always rational in their dealings with the economy. It uses and applies psychology to come up with a model of behaviour in various interactions between society and the economy on several levels. How an individual interacts with and responds to societal influences, how one processes and understands information on an intellectual level as well as an emotional one all contribute to financial decision making. There are many things that can affect our behaviour and it will sometimes come out in our financial situations or the stock market, for example. This field of study is in a way, asking the why of economic/financial situations.
Why people risk money in a certain stock or bond over another, why people shop compulsively, why some people refuse to save for retirement and rather live for today. Why society does things is very important to the study of behavioural economics. One expert in this field is George Loewenstein.
George Loewenstein is a Professor of Economics and Psychology at Carnegie Mellon University in Pittsburgh, Pennsylvania and Director of the Center for Behavioural Decision Research. He received a B.A in economics from Brandeis University, Massachusetts in 1977 and later a PhD in economics from Yale University in 1985. He has also been the author of several books on economy/economics and the behavioural theory. At the end of this section are related links you can explore to obtain more in depth information.
Another expert is Steven Covey, world renowned author of “7 habits of highly effective people” and other books. He once said “Any product or program – whether it deals with losing weight or mastering skills – that promises ‘quick, free instant and easy’ results will probably not be based on correct principles”.
Behavioural changes take time, so EFLS materials not only analyze the motivations and influential forces that compel people to make poor decisions, but also try to allow an appropriate time frame for positive change.
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