Assignment Four

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1 Assignment Four Maisha Desai York University Course Date

2 Assignment Four Describe the values underlying neoclassical economics and explain why the field relies heavily on very specific assumptions about human behaviour.” Neoclassical economics makes numerous, highly specific behavioural assumptions about people. These basic presumptions hold that people behave logically and seek to maximise self-interest. It is expected that all organisational members have similar interests and that all decisions are stable and advantageous to the business. People can make independent decisions if they are given enough knowledge, according to another claim ( Corporate Finance Institute , 2021). Some economists make the erroneous assumption that people invest or buy things in the economy in a logical manner. Neoclassical economics and behavioural economists make the assumption that humans make decisions based on emotion and are susceptible to distraction. They make the supposition that people make logical choices when making purchases or making investments in the economy, choosing options that would maximise gains and minimise losses. Neoclassical economists hold that market equilibrium must be restored through competition in order to properly allocate resources and prevent any economic imbalances. Neoclassical economics ignores individual diversity in beliefs, attitudes, and capacities in favour of a very one-sided view of how people actually are. How have these assumptions been refuted by the emerging field of behavioral economics? The assumptions of neoclassical economics are challenged by behavioural economics, which contends that individuals' judgements are heavily impacted by their own biases and heuristics. In other words, there isn't always a single "right" response

3 to this. Heuristics can either benefit or hurt, according to behavioural economics. This viewpoint acknowledges that not everyone makes decisions with the same attitude. Humans are known to be fallible and to hold diverse viewpoints; we do not always act in a sensible manner. Additionally, behavioural economics disproves the idea that individuals always act independently. Although it's possible that some people can operate well and independently, in practise, that isn't usually the case. In many firms, management hierarchies have been shown to be successful in keeping individuals focused on finishing their tasks. Neoclassical economics contends that individuals seek to maximise their own self-interested utility, while behavioural economics contends that individuals can be satisfied with less. All viewpoints and views must be respected and taken into account, particularly in the inclusive and egalitarian society of today. Within a group, settling for less than ideal solutions promotes the most cooperative solutions. According to behavioural economists, decision-making is frequently influenced by people's emotions and propensity for distraction. These new behavioural economics-related presumptions are put out to explain why certain decisions are made and how they affect economic models. It makes sense for someone who wishes to live a healthy lifestyle, for example, to research appropriate foods to eat and modify their diet and exercise routine. People attempt to make rational decisions, but sometimes external factors and emotions interfere, leading to irrational decisions. Because of the neoclassical framework, economists frequently assert that distributional and economic efficiency issues may be treated separately. The focus on efficiency issues and the significance of economic growth in policy discourse are justified by this division, leaving it to governments to handle distributional issues in a

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4 rather ad hoc and illegal fashion. And one of its main effects was the capacity to distinguish between distribution and efficiency difficulties. Give an example from your personal experience of how you violated one of the central assumptions of neoclassical economics. I disagreed with neoclassical economics at one point when I was a hotel server. I developed a dependence on earning extra money from tips and frequently put extra shifts ahead of my studies or rest. My social life and grades abruptly declined as a result, which made me understand that I wasn't functioning logically. I failed to strike a balance between my desires and what was actually crucial. I learned from this experience that a decent education could help me earn more than the transitory income I was receiving from my minimum-wage job.

5 References Corporate Finance Institute (2021). Neoclassical Economics and Assumptions Dyer, L. (2006). Critical Thinking for Business Students . Captus Press. (Chapter 4: Underlying assumptions) Fox, J. (2012) The Economics of Well-Being. Harvard Business Review , 90 (1), 78-83. Fox, J. (2015) From “Economic Man” to Behavioral Economics. Harvard Business Review , 93 (5), 78–85. Ragan, C. (2015: June 16) Adam Smith’s greatest legacy is his balanced approach. The Globe and Mail

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