Plane Thermoelastic Waves in Infinite Half-Space Caused


FACTA UNIVERSITATIS  
Series: Economics and Organization Vol. 11, N

o
 3, 2014, pp. 191 - 205 

Review paper 

BEHAVIORAL ANALYSIS OF ECONOMIC CHOICE: 

CONTRIBUTION TO IMPROVING ECONOMIC RATIONALITY  

UDC 159.9.019.4:330 

Dragan Petrović 

University of Niš, Faculty of Economics, Serbia 

Abstract. If we start from the presumption that the aim of the theoretical analysis of the 

complex socio-economic reality is to provide certain knowledge by applying of which 

there can be improvement and betterment of that reality, then economical and 

theoretical mainstream usually does this starting from axiom of the rationality. On the 

other hand, if we keep in mind the current empirical data on the numerous problems 

and inefficient functioning of the economic actors, then the logical question that occurs 

is whether the presumption of the unlimited rationality of the economic subjects should 

be so easily idealised. Starting from the fact that the bihevioral economics has a special 

role in the powerful critical attack on the “strong core” of the neo-classical 

mainstream, this paper discusses numerous psychological limitations of the process of 

economic decision-making, and the possibilities of their overcoming. In relation to this, 

we especially emphasize the importance of the behavioral analysis and its 

instrumentalist support directed toward the improvement of economic rationality and 

the quality of human decisions. 

Key Words: rational choice, behavioral economics, behavioral anomalies and biases, 

„new‟ paternalism 

INTRODUCTION 

It is widespread opinion that the economic science is on a high level in the world of the 

social sciences. The economic science primarily owns such a reputation to the presumption 

of the rational behaviour. As a matter of fact, the promoters of the economic ideas have 

been usually starting from the basic principles of deductive logic when constructing the 

formal models of the human behaviour. These principles state that the economic research is 

based on certain presumptions or axioms that don‟t need to be proved. 

                                                 
Received September 5, 2014 / Accepted December 17, 2014 

Corresponding author: Dragan Petrović 
Faculty of Economics, University of Niš, Trg kralja Aleksandra 11, 18000 Niš, Serbia 

Tel: +381 18 528 652  E-mail: dragan.petrovic@eknfak.ni.ac.rs 



D. PETROVIĆ 192 

The typical axiom from which the neoclassical mainstream theory starts is the rational 

behaviour of the economic subjects in the basis of which is the presumption that the 

complex social phenomena can be explained within the boundaries of the elemental social 

impact from which they are constructed. This point of view, known as the methodological 

individualism, demands from the theoreticians of the rational choice to start their research 

with the individual impacts, and to analyse the other social phenomena as secondary or as 

derived from the individual impacts. This means that the starting point are the universal 

theoretic frames concerned with the individual that behaves rationally no matter in which of 

the economic activities he takes part (consumer, house hold, enterpriser). After that the 

theories of consumption, production, prices etc, can be created, with no help of the 

methodological transmission mechanisms. At the same time the accent is on the concept of 

the maximising rationality that starts from achieving the high satisfaction of the economic 

agents and in which the firms are reduced on the manufacturing functions, consumers on 

the utility functions, the institutions are given, and the process of optimisation is omnipresent. 

The model of research that starts from the concept of the maximising rationality is close 

to the economists, or better to say their favourite. However, numerous empirical data about 

the problems and the inefficient functioning of the economic actors seem to more and more 

raise the question of whether and how should be persistent in defending the „boundaries‟ of 

the maximising reality. This dilemma is not a simple one and it can be proved by the fact 

that any kind of accepting the existence of the bounded rationality would mean that there 

are also forms of irrational behaviour on the market. On the other hand, one should not 

ignore the fact that the conception of the full and maximising rationality shows considerable 

weaknesses related to the real functioning of the economy, or related to the explanation in 

which way the real human mind brings economic decisions and how it adjusts itself to the 

circumstances of the real world.  

The above stated theoretical methodological problems and doubts related to the 

phenomenology of the human rationality and maximisation, have caused the appearance and 

development of the concept of the bounded rationality. As the first ones who opposed the 

concept of the maximising, the representatives of behavioral economic theory should be 

mentioned.    

The behavioral economic theory has been created as a symbiosis of the economic 

science and psychology. Its key premise is concerned with giving up the widely accepted 

model of the rational choice – the fundament on which the traditional economic analysis is 

based. Many experiments, conducted by the behavioral economists have shown that the 

realistic behavior of people does not have much in common with the main protagonist of 

the neoclassical theory – hyper-rational homo economicus- who has unlimited calculating 

capabilities and perfect information. 

Having in mind the strengthening of the reputation and the position of the behavioral 

economics in various areas, the aim of this paper is to make the realistic insight of its 

importance from the standpoint of improving the understanding of the economic behavior. 

This aim will be achieved through examining the hypothesis about the fact that the 

behavioral analysis of economic choice, on the basis of identifying numerous failures 

related to the psychological dysfunctions, provides powerful instrumentalist support for 

designing government measures directed toward improvement quality of human decisions. 



 Behavioral Analysis of Economic Choice: Contribution to Improving Economic Rationality 193 

1. THE STANDARD MODEL OF THE RATIONAL CHOICE 

The standard approach, accepted in the economic theory, presupposes a full rationality 

of the economic actors. From the standpoint of the methodology and the conception of the 

scientific progress, the rational choice definitely represents a hard core of the scientific 

research program of the neoclassical micro economy (Lakatos, 1970, p. 191). When the 

economists talk about the full rationality, they have in mind a couple of things. First of all it 

assumed that the individuals are capable to hierarchically order their preferences and needs 

(Robins, 1945[1932], pp. 78-79), and therefore to undertake actions in the direction of their 

full satisfying. Next, it is assumed that they have a capability of precise calculating of the 

expenses and utility connected to different variants of choice. That means that when they 

face a couple of options, individuals usually choose the one that gives best results (Elster, 

1989, p. 22). Finally, in the conditions of uncertainty, the individuals rely on the calculating 

of the possibility of happening of certain events and possible outcomes, using all the 

available information for this purpose, also those that can help them to successfully correct 

their starting judgments and calculations (Camerer, et al., 2003, pp. 1214 -1215). 

The understanding of rationality, as presented in the modern economic theory, has the 

epithet of formal. As a matter of fact, on the basis of the formalistic method that presupposes 

the existence of the formal system of the logical ties (Wilber, Harrison, 1978, p.62), the 

notion of rationality doesn‟t speak about whether the aims to which the individuals strive 

are justified or not, or whether there is any contradiction or opposition of the individual 

preferences. The dominant purpose of understanding the rationality is making a 

presumption about the existence of choice, which implies that with any given structure of 

preferences and group of limitations (physical, institutionalized, informational) the 

individuals choose for themselves the best variant from the group of available variants of 

resource usage. This means that from the rational individuals we expect they would make 

identical choice in the identical situations, without later reconsidering or regret for the 

alternative they didn‟t choose. 

In addition to the presumption that the rational individual has personal preferences 

and that they are the basis of his choice, the notion of the rational individual has mild 

presumptions of the logical consistency expressed in the following axioms: 

 The condition of completeness (independently from the degree of difference or 
similarity of the alternatives, the person that reaches a decision I capable to 

compare and order them hierarchically), 

 The condition of transitivity (if a rational individual prefers the alternative option 
A in relation to the alternative option B, as well as the alternative option C, then 

he prefers A in relation to C), 

 The independency of the context (the choice between two options does not depend 
from the order in which they appear, or whether a third alternative is available). 

The last axiom refers to the fact that the individuals act and behave in the same way 

independently from whether they do it separately or together in a system. This axiom can 

be connected in the theoretical methodological literature with the individualist component 

of the theory of rational choice and the method of isolation related to this theory. As a 

matter of fact, the supporters and those who criticize the theory of the rational choice 

point out that it is psychological and individualistic. It is psychological because it explains 

the acts of the participants starting from their mental conditions. This theory is simultaneously 

individualistic because it is applied on the behavior of the individual participants and on 



D. PETROVIĆ 194 

the individual activities. The social groups are observed solely as aggregates made of 

individuals, which means that their behavior is explained starting from the mental condition 

of the individuals and their interactions. Therefore, in the basis of this view of the structure 

of the economic and any other system is the presumption of the possibility to „isolate‟ the 

individuals and to analise them separately and out of the context of which they are a 

consistent part (Zwirn, 2007, p.54). 

Philosophically speaking, the presumption of the rationality of behavior is equivalent to 

the presumption about the unity of the economic actors - about the existence of a unified „I‟ 

in each one of them. The argumentation of the representatives of the neoclassical economic 

theory is in favor of the unified function of utility, it originates according to their opinion 

from the logical presumption that when we speak about the homo oeconomicus we can not 

think about a split personality. In addition to the logical explanations, it is interesting that 

we also have some picturesque explanations related to this, like those that „in each man 

there is only one nose or one stomach‟ (Saint-Paul, 2011, p. 20). 

For the neoclassical theory the principle of rationality has not only the analytical but 

also a normative meaning, which is expressed not only during describing or explaining of 

the observed phenomena but also during evaluating the alternative options by the terms 

good/bad. The statement that the individuals always behave rationally is in an unbreakable 

tie with the presumption that they excellently know what is in their best interest, and that 

there is no one who knows it better than them. That is why this presumption is 

simultaneously normative and positive: the individuals should always act for their best 

interest (Golubović, 2011, p. 156). In this way we actualize the question of how we should 

decide, which has among other things, influenced during the half of the twentieth century 

the appearance of the normative theory of decision making. Contrary to the descriptive 

theory whose aim is describing of the things as they are, the normative theory of decision 

making deals with the concept of rationality and the logic of making decisions, in the way 

they should be (Milicević, et al., 2007, p. 147) 

2. THE BEHAVIORAL ECONOMICS ABOUT THE STANDARD MODELS OF RATIONAL CHOICE 

The theory of the rational choice has proved to be very useful, and it is even empirically 

proved in many situations such as those of the competition markets (Ostrom, 1998). The 

fact is, however, that their conclusions often don‟t find confirmation in the empirical 

research. On this, among others, particularly insisted representatives of the new analytical 

approach that introduced and strengthened the name behavioral economics. Its constituting 

as an independent subdiscipline within the economic science was significantly affected by 

the „old“ behavioral economics related to H. Simon (1955, 1957) and J. Katona (1951), that 

emerged in the 1950s and 1960s. Then, in the 1970s, by publishment of the two articles of 

the well-known psychologists D. Kahneman and A. Tversky (1974), affirmation new 

behavioral economics occured. In these articles they criticized the orthodox theory of 

expected utility, proposing the alternative conception of reaching decisions in the conditions 

of uncertainty, known under the name „prospect theory‟. The same importance was given 

to Thaler (1980) from the standpoint of popularization of the ideas of behaviorism. In his 

famous article he listed many empirical evidences about the suboptimality of the economic 

decisions.  Following their example a large umber of economists and psychologists entered 

the process of the „dismantlement‟ of the model of rational choice, bringing up more and 



 Behavioral Analysis of Economic Choice: Contribution to Improving Economic Rationality 195 

more denying facts. Among the active representatives of the behavioral economy, among 

others, we can mention G. Akerlof, D. Ariely, C. Camerer, G. Loewenstein, D. Laibson, 

M. Rabin, C. Sunstein etc.  

The representatives of the behavioral economics strive to offer numerous empirical 

proofs about the fact that the real behavior of people is not depicting the key segments 

and demands of the formal models. “We argue that the deviations of actual behavior from 

the normative model are too widespread to be ignored, too systematic to be dismissed as 

random error, and too fundamental to be accommodated by relaxing the normative system” 

(Tversky, Kahneman, 1986, p. 252). That is the key reason why “behavioral economics 

deals with the factors that influence the decisions of market participants, based on bounded 

- not perfect - rationality. One is not to start from the assumed behavior but to explore the 

actual human behavior” (Stojanović, 2013, p. 569). This means that it places in the centre 

of analysis the fact that people have limited knowledge, information and cognitive 

capabilities, which is why they can not judge about the real events in the way that the 

standard model of the rational choice demands. 

The behavioral economics insists that the real life abounds with the examples of 

irrational behavior, which strongly shakes the philosophical foundations of the conventional 

choice, especially the presumptions about the identification of the personal interests and the 

existence of the unified psychological center of decision making. As a matter of fact, the 

results of the empirical research show that in many cases people find it hard identify, 

comprehend and represent to the environment their true interests, so that it often happens 

that in accordance with the emotional inversion in relation to the real standard of the 

stimulants, they act contrary to them. That is why the question that is repeated is what 

gives us the right to presuppose that the individuals always know which of the possible 

variants of impact is the best for them, and whether this presumption pretends to occupy 

the role of the normative standard for determining the welfare independently from whether 

we talk about the individuals or the society as a whole (Капелюшников, 2013, p. 74). 

In addition to the difficulties related to identifying and representing the individual 

interests, the aberrations from the rational behavior are the consequence of the functioning 

of the complex psychology of the individual. As a matter of fact, people are as a rule 

characterized by a multipltle I, which is often obvious in the situations in which reaching 

of the individual decisions is based on fulfilling selfish interests, not taking into consideration 

the interests of the other individuals. When, however, each individual acts exclusively as a 

rational maximizing factor of utility, it is expected that the real behavior doesn‟t result in 

the results that were intended. 

By giving up the idea of practical impossibility of applying the global, overall rationality, 

the question that is up-to-date is concerned with the way of understanding and interpreting 

the surrounding in the conditions of scarce knowledge and limited analytical capabilities. In 

relation to this we can start the analysis by presenting the two basic conceptions about 

obtaining and usage of the available data (Ходжсон, 2000, pp. 49-50). The first is the 

conception of the direct cognition of the socio-economic reality. It is a kind of a direct, 

immediate empiricism which supposes that in the process of cognition we can use the 

empirical facts freely. It is assumed that the subjects get the information from the 

surrounding, without the previous structuring of the notions, rules and theories. This means 

that the information are directly acquired, to be later transformed into the useful knowledge, 

getting a form of the undeniable facts and precisely defined probabilities of the occurrence 

of a certain event. The information is precise and sufficiently transparent, so that we can 



D. PETROVIĆ 196 

expect the rational economic actors to react the same in case they have this information. 

If they ever had certain wrong understandings and beliefs, they will correct them in 

accordance with the newly gathered information and fresh experience. That is why it is 

believed that the wrong beliefs can not last too long, or that they can not be the lasting 

characteristic of the process of cognition, although there are facts that deny such an 

optimistic scenario (Frey, 1992, p. 244). 

As opposed to this optimistic version of judging the existing phenomena and events there 

is a conception of the real cognition of the world. It questions the issue of the capability of the 

common, average observer to directly and unmistakably decide what to do on the economic 

plan. Additionally, the insufficient capacities in the right judgment are explained by the 

conceptual difference between the data and information gathered by the senses. As a matter 

of fact, the data include a multitude of the auditory, visual and other signals that reach the 

human brain. However, the knowledge about the real socio-economical occurrences is not 

formed in the moment of obtaining the stimuli of the senses but in the moment of their 

reaching the human brain and placing in the system of the abstract notions and conceptions. 

We should adequately value not only the immediate accumulation of the information but 

also the development of the cognitive capacities, or acquiring of the practical and 

intellectual habits in the realization of the cognitive process. This means that lots of 

information can go through the thick „cognitive sieve‟ in order to be interpreted in the right 

way (Petrović, Stefanović, 2009, p. 34). That is why when the stimuli of the senses come on 

the basis of the acquired information they are not strongly contradictory to the existing 

scheme of the notional conceptions, the individuals can relatively easily realize the process 

of the cognition of the environment. However if the information is not in accordance with 

the existing categorical apparatus, the question of forming the perceptions is actualized and 

also their influence on the decision making. That is why in the case when the stimuli of the 

senses are not strongly contradicting with the existent scheme of the notional conceptions, 

the individuals can relatively easily realize the process of cognition of the environment. 

However if the information is not in accordance with the existing categorical apparatus, the 

question of forming the perceptions is actualized and also of their influence on the decision 

making. That is why in the case of the „invasion‟ of insufficiently clarified information it is 

necessary to ignore them, or to change the existing conceptual structure in accordance with 

this information. But, whatever happens, it is obvious that the wrong beliefs can not be 

momentarily excluded and that their correction is along process of the theoretically-

empirical coming face to face. 

3. THE BASIC COGNITIVE AND BEHAVIORAL BIASES IN THE PROCESS OF DECISION MAKING 

All the economic models that start from the presumptions that the information is available, 

clear and precise, and that the economic agents always react to the same information in the 

same way, can be brought into question. The reality abounds with the examples of the 

aberration from the non-conventional rational model, which is primarily related to the 

cognitive limitations and mistakes made on this basis. The economic subjects for example can 

make mistakes when they reach decisions without the influence of the available information, 

often having too much confidence and in relation to this not giving up the fulfillment of the 

planned decisions. That is when as a rule they act inertly, unrealistically judging the 

probability of occurrence of the future events. On the other hand, they can act impulsively 



 Behavioral Analysis of Economic Choice: Contribution to Improving Economic Rationality 197 

and under the influence of the rapidly changing emotional conditions. That is why it is 

not surprising when in certain situations rather competent, functionally literate and 

successful people can behave irrationally, which can harm their long-term interests. 

The research in the field of the human decision making try to detect the system mistakes 

that people make. Among the numerous mistakes related to the psychological dysfunctions, 

this time we will talk only about those that are most often mentioned among the 

representatives of the behavioral economics. 

1. The hyperbolic discounting. It is well-known that the individuals prefer the present 

goods and that therefore they are ready to sacrifice a large quantity of the future goods in 

order to spend the smaller quantity of them in the future. The proportions of this 

conversion however are the result of the subjective norms connected to the evaluating of 

the time in the sense of the benefits of enjoying the ongoing consumption. Since the 

subjectively shaped judgments can be rather different from one individual to the other, it 

can happen that during the decision making about the usage of resources individuals start 

from different rates of discounting. That is why for example patient people have a lower 

discount rate while the impatient ones have a high rate. 

 The decisions about the usage of the resources can be considered rational if the rate 

of discounting is unchanged and constant during time. The „exchange‟ of these two 

periods of time is then exclusively influenced by their time distance and as such it doesn‟t 

depend from the time difference of these periods in relation to the actual moment of time. 

The algorithm of discounting defined in such a way is called the exponent, having in 

mind that to the extent of distancing in relation to the present moment the value of the 

future goods is lessened according to the exponent rate. 

However, as explained by the behaviorists, many people and maybe the majority of 

them are in the real life inconsistent concerning discounting, practicing the exponential 

instead of the hyperbolic discounting (Rizzo, Whitman, 2009, p. 924) This means that the 

norms of discounting that they use are not consistent, and that they are become higher 

with the closeness of the period that is being compared with the present period. That is 

why an individual can judge that 100 dollars that he should get for two years are the 

equivalent to the amount of 90 dollars that he could get for a year, but simultaneously he 

can judge that 100 dollars can have the same value in a year as 80 dollars in the actual 

period of time. It turns out that the discounting factor in the first case is 0.90 and in the 

second 0.80, or that the individual can have two discounting factors: 0.90 in the two next 

years in the future and 0.80 between the current and next year (ibid., p. 925). 

Making decisions in the conditions of the hyperbolic discounting gets marks of the 

disharmonious process in time. For example, at one moment an individual t0 can show his 

intention to put in the moment t1 85 dollars on a savings account in a bank if the effective 

interest rate guarantees gaining 100 dollars in the moment t2, starting from the fact that if 

the discount rate is 0,9 this seems to be a right decision. However, when the moment t1 

happens, he can give up his previous intention and 85 dollars, planned for savings can be 

redirected to spending. Placing money in a bank when the discount rate is 0,8 can seem to 

him as a less payable solution in compared to the spending of the desired goods. It turns 

out that in the conditions of the hyperbolic discounting, an individual starts a real 

„discord‟ between the potential alternative decisions, choosing first one and then the other 

alternative option. It is analogue to the everyday questioning of the decisions in life, 

which all the people on planet face. For example, a man can plan to start putting money 



D. PETROVIĆ 198 

aside for saving since the New Year‟s Eve, or to stop smoking and start strict diet, but when 

that moment comes he gives up. 

The above mentioned models of behavior are placed by the behavioral theory in the 

category of the irrational human acting. There are primarily related to the lack of self-

control, reflecting that people are not ready to resist the temptations. The strong 

impatience is followed by the high short term rate of discount, when those decisions that 

we assume will bring certain benefit are made, and that the expenses that follow the process 

of decision making will come gradually over time. Such an approach can, unfortunately 

result in the negative occurrences such as delaying of reaching the important decisions, 

forming of the portfolio of the mutually exclusive financial instruments (when for example, 

individuals use credit cards with the high interest rates, while simultaneously they buy 

valuable papers with lower incomes), to high indebting, low savings etc (Капелюшников, 

2013, p. 76) 

2. Psychological state. The process of decision making is strongly influenced by the 

psychological state of the individuals (“hot” or “cold” state) which can result in the effects 

which to a large extent from what they would fulfill if they were governed by the elementar 

norms of the rational behavior. In some affective, biologically „hot‟ and „burning‟ states, 

individuals tend to make some hasty decisions, which will turn out to be wrong and very 

„expensive‟ and that after they have been made the return to the old state is impossible 

(Camerer, et al., 2003, p. 1238). The individuals then usually start to overestimate the 

potential short term utility, ignoring the possible long term damage and high expenses of 

reaching such decisions. In that way, for example students in the state of disappointment, 

anger and fear can make a decision about finishing their studies, which in the long term 

can turn out to be a completely wrong move. 

3. The dependency from the context can occur in two basic forms. The first is known 

as the „framing effect‟ (Rizzo, Whitman, 2009, p. 928), when the choice is made under 

the influence of the less important aspects characteristic for certain situations and events. 

It is related to the violation of the principle of „independence from the insignificant 

alternatives‟ which is why, among other things the orientation in favor of A or B depends 

from the order of representing the options A and B. The influence of the psychological 

aspects on the process of acquiring and processing of information as well as on the 

hierarchical shaping and organization of the preferences can be characterized as a “disjunction 

effect: people prefer information X over information Y when they know that event A will not 

occur, but they prefer information Y over information X when they do not know whether 

event A will occur” (Garsia, 2013, p. 300). 

We can illustrate the fact that the choice is very dependent from seemingly unimportant 

aspects of the situation, like the order of the presented options, by an example from the 

medical practice: when the patients are being informed that the proposed procedure of 

therapy has the rate of surviving of 90%, the majority will probably be ready to undergo it. 

However, if the order of the sentences is different and if we say first that the rate of dying 

during the proposed procedure is 10%, there is a high probability that the majority will 

show their intention to give up from it.                

The dependency from the context can be observed through the possibility of evaluating 

the available alternatives on the basis of comparison with some referent values, sums or 

amounts. The referent point with which we compare can be a result of a personal 

experience, but also of some other factors that come from the surrounding. That is how a 

student can measure his success in the absolute sense, or in relation to the best possible 



 Behavioral Analysis of Economic Choice: Contribution to Improving Economic Rationality 199 

result that can be achieved by passing the exams. The above mentioned phenomenon 

however can be approached relatively, comparing one‟s own success with the success of 

colleagues. Similarly to this, the owner of a company can in one context be dissatisfied with 

the business of the firm, thinking that he didn‟t achieve the desired results. However, in the 

other context, on the basis of comparison with the business results of the firms from the 

surrounding, he can even be relatively satisfied with the achieved. 

The effect of the dependence exists in the case when the answers to the questions are 

subconsciously adjusted to some of the previously arbitrary offered anchor. The anchoring 

is a set of influences that are applied in many psychological researches that are related to 

the beliefs about the uncertain quantities. In these experiments, the subject is asked to 

judge whether certain value (anchor) in these experiments is higher or lower than the 

uncertain quantity. The rough result is that the subjects start from the anchor and don‟t 

succeed to completely correct their judgment in accordance with their basic belief, so that 

their judgment is inclined toward the anchor. Even explicit uninformative hint, for example 

accidentally chosen number can function as an anchor. Usual explanation for the occurrence 

of anchoring is that the value of the anchor offers, at least temporarily a possibility for the 

quantity that is estimated to be around that value. For example, houses and cars are sold by 

bargain that begins from the initial price. It would be surprising if the initial price wouldn‟t 

have any influence on the perceptions (MekFaden, 2003, pp. 184-185). 

4. The mistakes related to the optimism and pessimism (Rizzo, Whitman, 2009, p. 940). 

Depending whether people are too confident or characterized by a lack of self-confidence, 

there are mistakes that are in behavioral economics brought into connection with optimism 

and pessimism. The mistakes caused by optimistic thinking happen as a consequence of 

ignoring certain probability of happening of the unwanted incidents, which can cause serious 

damage that can often not be repaired. That is why, for example an optimist can take a great 

risk, investing means into valuable papers with a high rate of interest. However, the secondary 

market of capital is because of its dynamics and mobility a typical area with a high level of 

uncertainty, and an individual has to be aware of this when reaching decision about buying 

shares of stocks of certain companies. On the other hand, the mistakes on the basis of 

pessimism are characteristic for people who are not sure of themselves, and who are therefore 

inclined toward exaggerating the probability of certain incidents occurrence. The consequence 

of this is that to strong cautiousness which as a rule results in avoiding any risk when it 

comes to investing. 

5. The effect of availability (availability bias) (ibid., p. 940). This effect is about the 

mistakes that happen when the individuals give too much importance to the easily 

available and key information, and too little to the initial probabilities, neglecting the fact 

that the causes are different. It is widely accepted that the first (the primary effect) or the 

last experiences (the recession effect) of the experience is , chronologically speaking, 

more easily called into memory than those that happened between them (MekFaden, 

2003, pp.186-187). For example, if recently there was a fire or it was written about in the 

newspaper during previous days, then people will think that the occurrence of fire is 

rather probable and that it happens often, which perhaps is not corresponding to the 

reality. When in family violence happens in Serbia or a cruel murder, the public is 

disturbed and there are conclusions that during the last months the violence in family has 

been intensified, and that the number of murder is enlarged. That, however, does not have 

to have basis in the statistical data, so more complete research could maybe result in the 



D. PETROVIĆ 200 

cruel fact that it was always happening, and that it only depicts the complexity of the 

human relations (Kitanović, Petrović, 2010, p. 111). 

The natural inclination of people toward overestimating the probability of occurrence 

of certain events on the basis of their witnessing such events in the close future, has its 

„economic weight‟. As a matter of fact, under the effect of the availability the individuals 

can give up even those projects that have rather moderate, reasonable degrees of risk, 

damaging in this way their welfare and life standard. For example, if there was recently a 

liquidation of a famous company, or a strike in a large company, many people will think 

that the bankruptcy and strikes have lately become often. Because of this, among other 

things, some workers of some companies can give up the intention to make legitimate 

demands for the salary increase, which can keep the employer in belief that they are 

satisfied with the salary that they are being paid. 

6. The mistakes related to presentation of the status quo (status quo bias) (Rizzo, 

Whitman, p. 935). It is related to the human tendency to be reserved toward anything 

new, even when it can bring a lot of benefit to them or when the expenses are related to 

„breaking up‟ with the old are relatively low. One of the reasons for such cautious 

evaluating of any changes is that people are rather emotional toward their work and the 

results of their impact which is not the case when the observers are not the participants of 

the observed actions and events. The other reason is related to the procrastination or 

delaying of reaching the decisions for future times. Finally, some people feel aversion 

toward the loss – the loss aversion which is why during comparing of the equivalent sums 

they tend to ascribe relatively higher negative value to the potential expenses than to 

positively evaluate the potential benefits (Капелюшников, 2013, p. 78). 

The endowment effect is closely related to the above mentioned mechanism and this 

effect is related to the change of relation toward things in the sense of evaluating them 

higher right after getting ownership over them. As a matter of fact the value of certain 

goods is in the eyes of individuals considerably higher when they are in their property, 

which however is not the case when these goods are not owned by them. That is why 

people appreciate certain diploma more after they get it or they value their houses more 

after they have built them. It is present even more when the individuals treat their capital 

that according to their strong belief they obtained by continuous abstinence from 

spending. That is why it is not surprising “that the minimum compensation that people 

demand to give up a good has been found to be several larger that the maximum amount 

they are willing to pay for commensurate entitlement” (Knetsch, 1989, p. 1277). 

4. BEHAVIORAL ECONOMICS IN THE FUNCTION OF THE RATIONAL CHOICE  

AND THE „NEW‟ PATERNALISM 

Although the behavioral economics doesn‟t interpret the economic behavior in 

accordance with the standard model of rational choice, this doesn‟t mean that one can‟t 

find the elements of any logical connection. The relationship between them is not one 

sided because the behavioral economics although it rejects the realism of the models of 

rational choice, doesn‟t question their normative demands and intentions. By pointing out 

the fact that people can make choices which are not consistent with their best interests, 

the representatives of the behavioral economics come to the idea that the paternalistically 

oriented policy can help the individuals to make better and decisions of higher quality. In 



 Behavioral Analysis of Economic Choice: Contribution to Improving Economic Rationality 201 

this way we come to the affirmation of the new normative program of the behavioral 

economics known under the term „the new paternalism‟. 

In principle, the paternalism withstands “interference with a person's liberty of action 

justified by reasons referring exclusively to the welfare, good, happiness, needs, interests or 

values of the person being coerced” (Dworkin, 1972, p. 65).  Although it doesn‟t have the 

mark of the state engagement, it is usual that under paternalism we primarily think about the 

activity in the field of bringing laws and measures that relax the process of decision 

making. Dependently from how deeply we enter the process of individual decision 

making, we can differentiate the „hard‟ and the „soft‟ paternalism (Madhadam, Gutmann, 

2013, 1-20). Although when the other conditions are the same we give priority to the 

„soft‟ paternalism and the characteristic of minimal limitation of the freedom of choice, 

we should not underestimate the justification of introducing some immediate prohibitions, 

direct limitations, as well as high taxes and other state charges. When measures of the „soft‟ 

paternalism don‟t give the desired results, it is justified that the state intervenes by a „fierce‟ 

limitation of the free choice. 

The instruments of the state policy that are supported by the „new‟ paternalists represent 

the complex combination of the legislative and administrative prohibitions, taxes, offering 

information that is needed, as well as certain means of persuading and manipulating with 

the „architecture‟ of choice. It is not only about the new original recommendations but also 

about the multitude of the usual instruments of the state regulations which were used 

before. In principle, the behaviorists find all forms of the government regulations to be 

desirable and allowed if they bring about the efficient prevention and correction of the 

cognitive and psychological biases and mistakes (Rizzo and Whitman, 2009, p. 910). 

Although the argumentation about the new paternalism is theoretically rather 

convincing, the practical realization of the paternalistic actions is not simple. In the 

conditions of the existence of the „multiple I‟ it is necessary to determine which are the 

„real‟ preferences of the individuals-which segments of choice should be taken as a starting 

point, and what can be left out. The additional problem is that the individuals can make not 

only useful, but from the standpoint of their interests wrong decisions. The fact that we 

supposedly know what is for our best interest is not automatically guaranteeing that we will 

behave in accordance with this. For example, the addicts continue with the self-destructive 

habits, although they have the expenses related to health, money, work and family ties. 

Therefore direct limitations and prohibitions are less supported by the representatives 

of the behavioral economics and the „new‟ paternalism than some traditional instruments 

of the government regulations such as sin taxes (alcoholic drinks, smoking, hazardous 

games) and the unhealthy food and drinks (greasy food, carbonated beverage etc) (O‟ 

Donoghue, Rabin, pp. 190-91). By enlarging the expenses related to the consummation of 

the harmful goods (junk food), „sin taxes‟ can lessen the negative consequences, caused 

by the defect will and hyperbolic discounting, redirecting in this way the individuals of 

the bounded rationality to the more reasonable and socially acceptable behavior. 

The actions of the individuals that are contradicting with their own interests, among 

other things, happen because they don‟t have sufficient information and unlimited 

cognitive capabilities. In order to prevent this and to direct the individual in the right way 

it is desirable to use the paternalistic intervention which would lead the individual to make 

the decision that he himself would make if he was deciding on the completely rational 

basis. The contribution of the behavioral economics in the field of promoting the state 

regulations can be best seen through the support of the process of manipulation with the 



D. PETROVIĆ 202 

„architecture of choice‟ (Santos, 2011, p. 720; Wright, Ginsburg, 2012, p. 1056). It is 

related to the fact that the government is due to make a choice for and instead an individual 

in certain cases, since we can assume that he cannot deal with such a task in certain 

situations. For example, one could propose to the workers to automatically take part in the 

savings plans (Sunstein, Thaler, 2003, p.1172) which helps in excluding the mistakes 

connected with the inconsistency, the weakness of will, the hyperbolic discounting etc.  

When we talk about the Republic of Serbia, and having in mind the negative experiences 

with the engagement of the state up to now, as well as the absence of the expected effects on 

the basis of its measures and actions, a question that arises is concerned with the theoretical 

relevancy and practical basis of the state interventionism as such. It seems that a certain 

progress can be made by the „new‟ behavioral economics, whose research helped us to be 

a step closer to the understanding of the behavior of the economic actors. Together with 

this, the presumptions for the affirmation of the „new‟ paternalism would be created and 

the creating of the corresponding government measures and activities directed toward 

supporting the efficient allocation of resources. If we have in mind the fact that the carriers 

of the economic activity in Serbia still haven‟t accepted the elementary norms of the market 

behavior, then the need for the new behaviorist approach and reaffirming of the role of the 

state in the light of enabling and easement of the rational choice is even more prominent. 

As opposed to the traditional paternalism, which from the perspective of the citizens 

of the Serbia is related to the need of the state to intervene in order to lessen the unequal 

share of the incomes and the contribution to the realization of the idea of equality, the 

„new‟ paternalism is directed toward helping the people to enlarge the level of their own 

welfare. This means that the role of the state is not in reacting and helping people after 

they have already certain, often wrong decisions about the allocation of the rare resources. 

Instead it is desirable to define the thought-out engagement of the state with the aim of 

improving the quality of the individual decisions. That is why the paternalistic syndrome 

embodied in the expectations of the citizens that the state will protect them even when they 

haven‟t accomplished the planned aims, should be changed and brought back into the realistic 

frames where the state is expected to make relative the problems that could possibly appear as 

a consequence of the cognitive and psychological limitations, to partly solve or even prevent 

them. In accordance with this, the citizens should gradually give up the beliefs about the 

government‟s responsibility to provide them medical treatments, education and job, and 

would gradually accept the market norms of behavior where the role of the state would be to 

make them capable adequately directed toward making rational decisions. 

CONCLUSION 

In spite of the efforts of some authors to point out that all the critiques of the 

neoclassical maximising hypothesis were futile, it is certain that the real rationality of the 

economic subjects deviates from the neoclassical model of the maximising rationality. If 

we add the fact that in the actual circumstances there is a higher level of uncertainty, then 

the question of sustainability of the model of the maximising reality becomes even more 

relevant. It seems that in this sense special attention should devote arguments of behavioral 

economic theory which related to the identifying psychological dysfunctions and anomalies. 

This is mainly about mistakes and failures that include the inconsistency related to the 

discounting, the changeability of the psychological and emotional state, the dependency 



 Behavioral Analysis of Economic Choice: Contribution to Improving Economic Rationality 203 

from the context, the lack of self-control, too strong optimism, the orientation toward the 

status quo etc. 

The denying of the „illusionist‟ model of unlimited rationality does not mean that the 

rational efforts of the economic subjects should also be denied, as well as the intentions of the 

individuals to be rational. Instead, from the point of view of the behavioral economics, it is 

desirable to reconstruct the actions of the individuals in certain situations based on to which 

we could assume how they would act in concrete circumstances, taking exclusively rational 

actions and activities. In this way the reconstruction of the behavior would get a form of the 

normative standard, on the basis of which it is possible to evaluate the effects of different 

forms of the state interference on the growth of the individual and social welfare. 

On the basis of all the above statements we can easily conclude that the representatives of 

the „new‟ behavioral economics have a double sided attitude toward the standard model of the 

rational choice. When they have in mind their descriptive character, they reject it 

determinately. However, when they observe it in the sense of the normative ideal, they not 

only accept it but also defend it fiercely. Having in mind that the bihevioral imperfection leads 

us into the situation that people can make choices which are not consistent with their best 

interests, the representatives of the behavioral economics came to the idea that the 

paternalistically oriented state can help the individuals to make better decisions.  

When observed in this way, the state intervention is turning into a tool, with the help of 

which we can bring „closer‟ the real behavior of the boundedly rational individuals to the 

ideal of the full rationality. In this way we come to the affirmation of the new normative 

program of the behavioral economics known as „the new paternalism‟. The opposing 

opinion to the classical liberal tradition that takes the bounded rationality of the individuals 

as an argument in favor of not spreading and broadening of the quantity of state interference 

in the sphere of economy and private life, the‟ new paternalism pushes forward the idea of 

the premeditated engagement of the state directed toward reaching a higher level of 

rationality of the economic actors. Therefore, all the mentioned ideas presented in the paper 

can be perceived in the context of the contribution to the affirmation comprehension of 

failures related to the psychological dysfunctions, which confirmed the basic hypothesis 

that the behavioral analysis of economic choice provides powerful instrumentalist support 

for designing government measures directed toward improvement quality of human 

decisions.  

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 Behavioral Analysis of Economic Choice: Contribution to Improving Economic Rationality 205 

BIHEVIORALNA ANALIZA EKONOMSKOG IZBORA: DOPRINOS 

UNAPREĐENJU EKONOMSKE RACIONALNOSTI 

Ako pođemo od pretpostavke da je zadatak teorijske analize kompleksne društveno-ekonomske 

stvarnosti da pruži određena saznanja čijom se praktičnom primenom može doći do unapređenja i 

poboljšanja te stvarnosti, onda to ekonomsko-teorijski mainstream obično čini polazeći od aksioma 

racionalnosti. Sa druge strane, ako imamo u vidu aktuelne empirijske podatke o brojnim 

problemima i neefikasnom funkcionisanju ekonomskih aktera, onda se postavlja logično pitanje da 

li bi pretpostavku o neograničenoj racionalnosti ekonomskih subjekata trebalo olako idealizovati. 

Polazeći od toga da bihevioralna ekonomija ima posebnu ulogu u snažnom kritičkom nasrtaju na 

"tvrdo jezgro" neoklasičnog mejnstrima, u radu se govori o brojnim psihološkim ograničenjima 

koja prate proces ekonomskog odlučivanja, kao i mogućnostima njihovog prevladavanja. S tim u 

vezi posebno se apostrofira značaj bihevioralne analize i njene instrumentalističke podrške 

usmerene na unapređenje ekonomske racionalnosti i poboljšanje kvaliteta ljudskih odluka.  

Ključne reči: racionalni izbor, bihevioralna ekonomija, bihevioralne anomalije i predrasude, 

„novi“ paternalizam.