Quote for the Week
One of the major differences between behavioural economics and standard economics, is that, in standard economics, the individual agent is supposed to be driven or motivated by the utility of future wealth and discounted future wealth and present wealth. In behavioural economics, agents are supposed to be motivated by something else: gains and losses.
This juxtaposition of gains and losses on the one side and wealth on the other is interesting. Gains and losses are temporary — they are events. Wealth, on the other hand, is a state. It is a broader way of looking at things. In fact, what dominates our behaviour is much more immediate than considerations of wealth. It is consideration of gains and losses. That is the essential idea of both behavioural economics and behavioural finance. A fully rational agent has a broad view – it has a long horizon. But a basic finding, well replicated in psychology and decision theory, is that people are myopic and that they weigh immediate consequences much more than delayed. There is in fact brain research that indicates that there are special brain circuits that respond to relatively immediate consequences, and other brain circuits that react to more delayed consequences, and we tend to be more rationale about the more delayed consequences than about the immediate consequences. — Daniel Kahneman (Source)