What does ‘homo economicus’ imply in economic theory?
‘Homo economicus’ refers to an idealized individual who makes decisions purely based on rational calculations for self-interest maximization. However, Daniel Kahneman’s work showed that real-life decisions often deviate from this rational model due to cognitive biases and emotional influences.
How does Kahneman’s work challenge the ‘homo economicus’ concept?
Kahneman’s research in cognitive psychology suggests that people do not always act as the ‘homo economicus’ model predicts. Instead, they are prone to errors in judgment and influenced by psychological factors, leading to less-than-optimal economic decisions.
What is the significance of delayed gratification in investment according to behavioral economics?
Delayed gratification is the ability to resist short-term temptations in order to achieve long-term objectives. In the context of investing, it involves forgoing immediate rewards for potential future financial gains, which requires self-control and foresight.
How does the principle of delayed gratification relate to the rejection of ‘homo economicus’?
While ‘homo economicus’ is expected to calculate the most rational economic outcomes, including long-term benefits, real individuals often opt for immediate gratification due to cognitive biases. Understanding and practicing delayed gratification counters this tendency and aligns decision-making with the more rational, long-term focused approach.
By recognizing these human tendencies, individuals can better strategize their investment decisions, focusing on long-term rewards rather than immediate returns.
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