Abstract
This paper proposes a mathematical two-stage decision making model based on dual-decision models from behavioral economics that includes, in addition to cognitive and affective systems, an individualistic human factor and a stochastic shock. The model provides a new vision of the decision-making process and the impact of individualism. In the first stage, the agent´s initial willingness to choose is obtained following traditional economic theory but including an individual human factor, which is composed by the learning process, free will, and other human factors. This allows us to explain the reason why sometimes people are inclined to choose options that seem to be irrational decisions from the view of traditional economics logic. In the second stage, the model explains how the cognitive and affective systems and the influence of a stochastic shock affect the initial willingness to choose, obtained in the first stage. The shock might be produced by those negative and/or positive feelings and information not known or considered previously that allows the individual arrive to the final decision. Finally, our model demonstrates that the individual human factor and the stochastic shock are fundamental elements that define the rational irrationality when traditional economic theory fails to explain individuals´ choices.
Highlights
Over time, the gap between Microeconomics and social and cognitive Psychology has been narrowing due to the rapid developments in the field of behavioral economics, game theory, and economic psychology, as pointed out by Carmerer and Loewenstein (2004)
According to Alós-Ferrer and Strack (2014), behavioral economics has matured due to the contributions that range from development of experiments to modifications of the assumptions of traditional models, which assume that decisions are made by rational agents, —agents who have welldefined preferences, clearly understand the environment in which they must make decisions, and have an ability to learn rapidly (Brocas and Carrillo, 2014)
We present this model with the purpose of not to predict the behavior or decision made by human beings but to analyze the impact of the human factor and the random stochastic shock, commonly defined as the irrational part of decisions, as the most influential factors in the process of individuals’ decision making
Summary
The gap between Microeconomics and social and cognitive Psychology has been narrowing due to the rapid developments in the field of behavioral economics, game theory, and economic psychology, as pointed out by Carmerer and Loewenstein (2004). As has already been demonstrated by models in the fields of behavioral economics (see Kandori, Mailath, and Rob, 1993; Young, 1993) and game theory (see Weibull, 1995), human decisions are not always derived from rational analysis (see Alchian, 1950; Simon, 1959) These new developments fit best the empirical evidence. Our model considers the theory and approaches of behavioral economics and how human action (individual freedom, learning, and other human factors related to the decision being evaluated) exerts the greatest influence in the first stage of decision-making.
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