Many often in all of our economics models we make the assumption that all individuals are rational and that any factor that cannot be explained is simply an exogenous variable. Although this simplifies many complicated behaviours and situations that are hard to model.
The reality is that many times models such as the DSGE model fail to take into account these human factors and often times oversimplify results. For instance, any factor that is not accounted in the model is taken as an exogenous variable and the individual re-adjusts their maximization problem to consider this new variable (maybe a change in the budget constraint). Nothing within the model creates an endogenous effect, any disturbance is simply attributed to an exogenous factor.
This is why I think it is very interesting to take into account the “behavioural aspect of economics”. By embracing such factors we are not just analyzing how individuals react to exogenous “shocks” but instead we are taking into account that those “shocks” are simply a result of economic behaviours and are not isolated events.
In models such as the Walrasian Model, it´s very simple to think of it as a few individuals trading their endowments and not much else. We analyze the case where something happens to the endowment and how it affects the new equilibrium. However, we never take into account that maybe the original equilibrium influenced the individual´s decisions and thus leading us to a new equilibrium without it coming from an outside “shock”.
Without a doubt over the last 10 years the behavioural economics field has developed more and more. This could be because we´ve finally come to realize that our models fail to predict behaviours because we tend to fall into assumptions about rationality, when in reality individuals not always act in the most rational ways.
I´d like to hear your opinions on this since it means that we have to add more complexity to the models we´ve studied for years. Is the cost of adding complexity worth it in order to have more precise models?
P. De Grauwe. (2017, November 06). Why behavioural economics could dictate the future of the discipline. Retrieved February 18, 2018, from https://www.weforum.org/agenda/2017/11/this-is-the-value-of-behavioural-economics-in-understanding-our-world/