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Kahneman's Rational Economic Model

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During the period of the development of traditional economics, researchers deducted the psychological nature of economic agents, thus, they created the model of homo economicus. Back in the 19th century, John Stuart Mills was the first who proposed the definition of the term (Persky 1995). According to Mill, homo economicus is '[…] solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end’ (1844). Homo economicus, or economic man, is characterized by using rational thinking to avoid redundant actions and maximize his own economic welfare.

The assumption of rationality became a fundamental premise for numerous economic theories, for example, rational choice theory and rational expectations theory. …show more content…

Only half a century later Daniel Kahneman’s work influenced by Herbert Simon’s theories received the Nobel Prize in economics for ‘having integrated insights from psychological research into economic science.’ Kahneman contrasted his psychological models against economic ones which he used as a benchmark. His research illustrates the bounded rationality of intuitive beliefs and choices through the investigation of the systematic biases that separate people’s beliefs and their choices from the optimal beliefs and choices presumed in rational-agent models.

The aforementioned studies and research led to the more recent approaches/developments in behavioral economics. American academics Richard H. Thaler and Cass R. Sunstein took a new step in behavioural economics. They developed a concept called ‘Nudge theory’ and popularized the term ‘nudge’ in their 2008 book 'Nudge: Improving Decisions About Health, Wealth, and Happiness'. The work on ‘heuristics, written by Daniel Kahneman and Amos Tversky served as a base for their research, thus, it had a huge impact on

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