IRRATIONAL HUMAN BEHAVIORS

Abstract

Neo Classical economists used to posit that, since consumers are rational, they make decisions to maximize their pleasure (utility). Opposing to Neo Classical understanding, Behavioral Economists argue that, consumers are infect not rational, but prone to all sort of biases and habits that pull them being rational. For instance, there are too many irrational choices made by the Turkish consumers like; expensive wedding parties given by low income families; although riding bicycle is healthy and cheap, but people buy expensive cars; it is cheaper staying at a hotel or a timeshare, however people buy expensive summer houses, where they stayed only few weeks a year. These type of irrational behaviors adversely affect the decisions on savings, investments and economic growth. On the consumers irrationality, Tversky and Daniel Kahneman, winner of the 2002 Nobel Prize in Economics, wrote Prospect Theory. They developed a cognitive psychological model to explain divergences from neoclassical economics. They claimed that people take decisions under psychological, social, emotional and economic factors that affect market prices and resource allocation. In order to explain the irrational behaviors of Turkish consumers, I utilized some concepts such as conspicuous consumption (or keeping up with Johns), Veblen Effect, Bandwagon Effect, bounded rationality, 20 to 80 Law and ethical considerations developed by Behavioral Economists and Heterodox Economics. Thus, I came to conclusion that why the free market economic understanding fails in Turkey by giving some examples and economic reasons stated in the last section of this paper.

Keywords

• veblen effect
• behavioral economics
• heteredox economics

References

1. Akerlof G. (1970), The Market for Lemons, Yale University Press
2. Bagwell L.S. and Bernheim D. (1996), “Veblen Effect Theory of Conspicuous Consumption”, The American Economic Review, 86(3), pp 349-373
3. Friedman, M., (1962), Capitalism and Freedom, University of Chicago Press
4. Kahneman D. and Tversky A. (2003), Choices, Values and Frames, Cambridge University Press