Neoclassical Economics vs. Behavioral Economics: Understanding the Differences

Economics has been a subject of study for centuries, and throughout that time, different schools of thought have emerged. Two prominent schools of thought are neoclassical economics and behavioural economics. While both schools of thought study the same subject matter, they differ in their underlying assumptions and methodology.

Neoclassical economics is based on the assumption that people act rationally and make decisions based on maximising their own self-interest. It assumes that individuals have complete information and make decisions based on a rational analysis of the costs and benefits of their choices. This school of thought is characterized by a focus on market efficiency and the role of price signals in allocating resources.

On the other hand, behavioral economics challenges the rationality assumption of neoclassical economics by recognising that people do not always act in their best interests. Behavioral economics is based on the idea that people are subject to cognitive biases, and that their decisions are influenced by emotions, social norms, and other non-rational factors. This school of thought emphasizes the importance of studying actual human behavior, rather than just assuming that people always act rationally.

The two schools of thought have different implications for policy. Neoclassical economics suggests that markets are efficient and that government intervention should be limited. Behavioural economics, however, recognizes that people do not always act in their own best interests, and therefore, government intervention may be necessary to correct market failures.

Despite the differences between neoclassical and behavioural economics, both schools of thought have made significant contributions to the field of economics. Neoclassical economics has been instrumental in developing mathematical models that describe economic behaviour, while behavioural economics has provided insights into how people actually make decisions.

Neoclassical economics and behavioral economics differ in their assumptions and methodology, they both offer valuable insights into the study of economics. By understanding the differences between these two schools of thought, we can develop a more nuanced understanding of economic behavior and make better-informed policy decisions.