Economics Assignment: Reflective Essays on Behavioral Economics.

This assignment comprises reflective essays on key readings in behavioral economics. The first essay discusses the evolution of behavioral economics and its impact on economic policies, emphasizing the influence of individual behavior on savings and investment. The second essay delves into behavioral portfolio theory, contrasting it with the mean-variance portfolio theory and highlighting the layered approach to portfolio construction based on distinct goals like upside potential and downside protection. The final essay explores how behavioral economics investigates market performance by incorporating psychological factors affecting decision-making, such as bounded rationality and self-interest, and its relevance in analyzing anomalies in financial markets. The reference list includes key academic papers and books in the field of behavioral economics.

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Economics Assignment
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Reflective Essay on Reading 1: Cashew to Nudges
The book acknowledges about the evolution of behavioral economies which is used as an
important tool to study the overall impact on economies. There are lot of factors that goes
beyond economics which cannot be passed upon one particular theory (Thaler 2018). The
amount and savings and investment depends on the individual and how much the person values
the good. It unfolds the story of growth and development with economics and the behaviour of
individuals. It enables to understand the theory of life cycle hypothesis which estimates how
much people expect to earn over their lifetime, will their plan be efficient, how to divide the
level of earnings suitably. Suppose the planned annual income is rising with the same level of
income (Thaler and Ganser 2015).
There exists several shifts in the study of consumer behaviour such as buying expensive
items, media issues, boom of start-ups, living standards, which would hamper the planned
outcome of individuals. These factors led to rising concerns for retirement savings and state
started planning about social security benefits and pensions. The paper provides a clear
indication how the reference and behaviour of individuals have led to implementation of
economic policies. Thus, behavioral economies establishes the fact that the study of economics
and economic policies are dependent on the way individuals behave.
Reflective Essay on Reading 2: Behavioural Portfolio theory
The paper puts forth a positive behavioral theory which is used as an alternative of mean-
variance portfolio theory as proposed by the Markowitz (Shefrin 2015). By, reading the paper, I
was able to understand about the behavioral portfolio theory in a more simplified way. There is a

wide difference in the portfolios of mutual fund companies to that of mean-variance of
portfolios, which is used in the capital asset pricing model. According to the financial investors,
portfolios has to be made in away such that it includes a higher ratio of stocks to bonds. These
advisors have included a fixed ratio of stocks and bonds under the risky asset and believe that
problems cannot be solved with standard explanation relating to dynamic portfolio allocation,
nominal debt, non-traded assets and the absence of risk traded assets (Statman 2018). However,
the investors calculates the value of portfolios as a whole by considering covariance of the assets
and developing their portfolio.
Portfolios under the behavioral framework, bear a resemblance of layered pyramids
which are linked with distinct goals and covariance within the layers are overlooked. Therefore,
the assumptions of the behavioral economies are different from that of variance portfolio theory.
The paper proposes about two very basic portfolio layers- the upside potential layer and the
down-side portfolio layer (Miłaszewicz 2019). The upside portfolio layer is used as an
instrument to become rich within a go, whereas, the downside protection layer is created to
prevent financial disaster. I can say that behavioral portfolio theory shows an inverse relation
between the stocks-bond ratios, which is affected by multiple factors such as the presence of
home bias, income and growth, securities and the purchase of lottery tickets. Thus, I can say that
behavioral portfolio theory is more crucial as it acknowledges the change in multiple economic
parameters that change the stock-bond ratio (Demeritt and Hoff 2018).
Reflective Essay on Reading 3: Behavioural Economics
The paper demonstrates the study of behavioral economies and how it is effective in the
investigation of market performance. Behavioral economies is the culmination of economies and
psychology that tries to understand the behaviour of individuals about the change in demand and

supply, preference of goods, interest rates and prediction of the future market outcomes (Thaler
2017). From the paper, I am able to develop a deep understanding of the ways that deviate
humans from the standard economic model. The limitation of arbitrage allows normal agents to
influence market outcomes. Bounded rationality limits the problem solving abilities of human
nature and might force to make choices that is devoid of long-term interests of the customers
(Laibson and List 2015). It also postulates how bounded self-interest leads to market
inefficiencies because humans have the will power to sacrifice their own interest in order to help
the others.
The paper also helps to illustrate the application of these concepts in savings and savings
(Camerer 2018). Generally financial markets have huge arbitrage opportunities, which makes the
theories of behavioral economics less important. Behavioral economics helps to analyse the
anomalies that affects the psychology of decision making by individuals. As savings require
more complex estimations and will power, behavioral economies is persistent for providing a
descriptive theory of the factors affecting markets (Chetty 2015).

Reference List
Camerer, C.F., 2018. Artificial intelligence and behavioral economics. In The Economics of
Artificial Intelligence: An Agenda. University of Chicago Press.
Chetty, R., 2015. Behavioral economics and public policy: A pragmatic perspective. American
Economic Review, 105(5), pp.1-33.
Demeritt, A. and Hoff, K., 2018. The making of behavioral development economics. The World
Bank.
Laibson, D. and List, J.A., 2015. Principles of (behavioral) economics. American Economic
Review, 105(5), pp.385-90.
Miłaszewicz, D., 2019. Behavioural Finance Then and Now. In Effective Investments on Capital
Markets (pp. 369-379). Springer, Cham.
Shefrin, H., 2015. The behavioral paradigm shift. Revista de Administração de Empresas, 55(1),
pp.95-98.
Statman, M., 2018. Behavioral Finance Moves into Its Second Generation. Journal of Financial
Planning.
Thaler, R.H. and Ganser, L.J., 2015. Misbehaving: The making of behavioral economics. New
York: WW Norton.
Thaler, R.H., 2017. Behavioral economics. Journal of Political Economy, 125(6), pp.1799-1805.
Thaler, R.H., 2018. From cashews to nudges: the evolution of behavioral economics. American
Economic Review, 108(6), pp.1265-87.