US economist Richard Thaler won the 2017 Nobel Economics Prize for his contributions in the field of...........

Economic Affairs Others

US economist Richard Thaler won the 2017 Nobel Economics Prize for his contributions in the field of behavioural economics. The study of behavioural economics includes how market decisions are made and the mechanisms that drive public choice. In this context, consider the following:

As per Heuristics, most decisions made by humans are done using rules of thumb.
Mis-pricings and non-rational decision are part of market behaviour which are considered as market inefficiencies.

Which of the above is/are correct?

1 only

2 only

Both 1 and 2

None

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Explanation:

Statement 1: Research says that Humans make nearly 95% of their decisions using mental shortcuts or rules of thumb. This means that decisions do not involve elaborate reasoning and often based on simplistic rules that are applied to a wide range of choices, even if those rules don’t really fit there.

Statement 2: Such mis-pricing can be due to lack of competition in the market, e.g. monopoly or due to irrational decision-making for e.g. selling stocks in hoards in the event of a rumour.

These cause market turbulence and inefficiencies.

By exploring the consequences of limited rationality, social preferences, and lack of self- control, the Nobel laureate has shown how these human traits systematically affect individual decisions as well as market outcomes. In total, Richard Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making