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To What Extent Does a Mentally Challenging Environment Affect Economic Rationality?

Essay by   •  February 9, 2018  •  Research Paper  •  2,234 Words (9 Pages)  •  945 Views

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Introduction

Economics is a social science. There is a tendency to refer to economics as a science which deals strictly with numbers, following a set of adamant rules, furthermore determining a certain outcome through the analysis of collected raw data. However, any patterns in economics are the patterns of the actors involved in economic activities, which essentially are human beings or a group of such, these economic actors are considered as rational and predictable. Behavioural economics is an interdisciplinary science, based on psychology, sociology, economics and the study of the connection between mentioned sciences. [1]Moreover, the study of behavioral economics involves ignoring the main laws of classic economics, laws of supply and demand, since it involves studying the irrationalities in those laws and why they are not always followed. A supply and demand perspective provides the larger picture of economics, while a behavioural view aims to explain the impracticality of applying classical economics towards individual economic actors.

This research aims to analyze the effect a mentally challenging environment can have on the economic rationality of consumers. The importance of such research is self-evident, living in a with the ever-growing presence of mental challenges, it is vital to understand the effect they can have on our economic rationality. The research will be done through the analysis of questionnaire data collected, the argumentation provided by Nobel Prize-winning Richard Thaler and general scholarly information on behavioral economics.

Literature Review

To understand the effect a mentally challenging environment has on economic rationality, the assumption that all economic actors incline to be rational must be argued. “The Wealth of Nations” (1776) by Adam Smith, formed classic economics, in the way we know it today, however, before that, in 1759, he published a book which in modern conditions would be considered as a study on behavioral economics.[2] “The Theory of Moral Sentiments” (1759) revolves around the aspects of human psychology.[3] The average human being is described as someone who is formed by both their “animalistic part” which is driven by passion, sudden needs, moral and social justice, and by an “impartial spectator” who plays the role of a critical, cold-minded economic analyst. Such division of human behavior is later picked up by Thaler, stating that people tend to consist of a “planner” and “doer.”[4] Both prominent scholars recognize that passion can deviate the “impartial spectator” or “planner” through emotion that is strong enough. Moreover, in the conditions of a mentally challenging environment, the “impartial spectator” may prone to focus on overcoming those issues. Thus the “doer” is left to his/her their bidding, which supports the thesis, that economic rationality may be affected.

Since Thaler’s rise to fame, behavioral economics has gained popularity among academics, the questions of rationality have been raised in different spheres, from healthcare to finance. Bruning and McCaughey argue that rationality in any sphere of which human interaction is an essential part of is impossible to reach “because humans make decisions with their naturally limited, faulty, and biased decision-making processes.”[5] Their argumentation is focused on the evidence-based approach to decision making, which is difficult for human beings to follow, due to the natural bias of the individual perspective each person is prone to. Neuroscience has been rapidly developing in the recent years, scholars of behavioral economics now collect empirical evidence of their theories from the micro reactions of the brain.[6] The work of Studer and Knecht is completed with a large amount of research on the functioning of the brain, by different inter-disciplinary theories, the most relevant to the thesis are the chapters on fatigue, competition, and adult neurobehavioral plasticity. In essence, they state that a state of cognitive and mental fatigue may cause the brain to work in a standard fashion. Thus, actions to which a person is used to, will not be difficult to complete, while any new routine, is near to impossible to do. The researcher has chosen to apply this theory not only to actions but the economic rationale. If a person is used to seeing a certain price of a product, in a state of extreme fatigue, the change to that price will cause undesirable thought processes, further analysis. Thus, this person may just choose to abstain from buying.

During the research, the “nudge” term is frequently used, which is the use of behavioral economics and its principles to shape a certain behavior or approach, among other economic actors.[7] The morality of such use of “nudges” is also discussed, in the aspects of finance, healthcare, policy-making and many others. The debate is shaped by the problem of enforcement of a certain view or stance upon other people. It is relative to the research, since the “nudge” of the given hypothesis, is not provided a certain government policy or an individual, it is self-created. The experiment this paper will use is university-based, meaning that the emphasis a student puts into the examination she/he has to face, is the “nudge”, which affects their clear judgment of a situation, indirectly, their economic rationality.

Experiment description

The conducted experiment is aimed at analyzing the effect a mentally challenging time-period has on the economic rationality of students. A period at the beginning of the second term in Nazarbayev University is taken, from October 10th to November 10th, 2017, timeframe one. Furthermore, a second timeframe, during the final examination, is used, from the 30th of November to December 3rd, 2017, timeframe two.[8] The objects of the experiments are goods and products which are deemed to increase cognitive potency and mental activity, coffee, dark chocolate, and energy drinks. The consumers during timeframe one will be further regarded as the control group, which at that moment does not have to face cognitive and mental challenges. The consumers during timeframe two will be the experimentation group. For the simplification of results and their analysis, twenty buyers from each timeframe will be chosen at random. The experiment will be conducted via the internet, through which sales will be carried out, this is done to achieve a higher level of external validity throughout the experiment since users of the internet are not constrained to gender, age or other social group affiliation factors. The price will not be initially known; it is the reaction to the price stated after the wish to buy the product has been confirmed, is what will be studied.

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