Abstract
The Chicago school argues that irrationality is the anti-thesis of rational markets. Simply put, a free market is a rational market. The behavioral economics on the other hand questions and successfully challenges this underlying assumption of rationality. It argues that man is not as rational as believed to be, on the contrary, s/he displays bounded rationality, bounded will power and bounded selfishness in real world scenarios. It tries to seek the rationale for such a rationality being bounded. Does this mean that humans are not innately as selfish as predicted? What are the constraints on this selfishness and rationality? But an equally important question is does the Behavioral approach provide a vivid representation of how the matrix of human response emerges in the backdrop of bounded rationality and thereby provide superior understanding of the firm and consumer behaviour. The present chapter deliberates on some of these case with examples of corporate context such as mergers and acquisitions, and availability cascade and formation of public opinion.
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