YEAR 2023 | 2

IRRATIONALITIES IN THE ECONOMY AND STATE INTERVENTION

José Neves Cruz

Keywords

behavioural economics; cognitive biases; irrationality; public finance; public choice; rational choice.

Abstract

The development of economic science with Psychology's critique of the formalism of the rational choice model and, in particular, the realization, based on experimental laboratory methods, that people often do not behave as the rational choice model advocates, has shaken neoclassical economic analysis. This work addressed the problem of deviations from rational choice due to cognitive biases. Some criticisms of the formalism of the rational choice model and the contributions of Psychology to a more comprehensive explanation of human behaviour were briefly described. Several types of cognitive biases studied by experimental methods were presented, showing that people often do not behave as the rational choice model recommends. Consideration was given to the implications of incorporating the influence of cognitive biases in decision-making into economics for the study of government intervention. A more traditional approach of government intervention as a corrective to market failures, including those resulting from the cognitive biases of market participants, was contrasted with an approach derived from the Public Choice approach that emphasizes the impact of the cognitive biases of market participants, policymakers, and bureaucrats on public choice.
 

Table of contents

ISSN: 2975-836X