1A descriptive (or positive) statement
–Describes the world as it is
–Can be confirmed or refuted
–Is centered on fact
2A normative statement
–Describes the world as it should be
–Cannot be confirmed or refuted with data
–Is opinion (perhaps widely accepted opinion, but
still opinion)
3descriptive theory
describes
how individuals actually make decisions
4normative theory
describes how
individuals should make decisions
5Theory: Firms as profit maximizers
2. I don’t think firms act this
way
1. I don’t think firms should act
this way
Identify the normative and positive objection.
1. Normative objection
2. Descriptive objection
6Behavioral Economics
1) identify areas in which standard economic
theory fails to make accurate predictions of
human behavior,
2) Understand the cause of these deviations,
primarily using insights from psychology, and
3) Amend the theory to make better predictions
of human behavior.
7Why do people do irrational things?
lazy, when asked a hard question, we answer a simple question, we find coherent stories to be most convincing, regardless of how complete they are
8Economics has developed a theory of consumer behavior (the individual as a....
a rational utility maximizer) that is comprehensive, elegant, and capable of making accurate aggregate predictions.