Contribution of behavioral economics to the
understanding between income and happiness
by Kanchiny Ramachandran
It has been accepted that traditional economic modeling is no longer accurate, especially in measuring an individual's happiness, as studies have shown that other factors rather than income also play a big role in an individual's happiness. New better models that incorporate links between economics, sociology, and psychology have been developed in order to better understand consumer choice. One of these models are aptly named "Behavioral Economics," as it attempts to provide better understanding of economic decisions by applying psychological principles of individual behavior to economics. Though it may not provide all the solutions to all economic phenomena, it provides more insight to the relationship between income, happiness, and the reasons behinds an individual's economic decision.
Behavioral Economics is defined as the "combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications" (Mullainathan n.d). It attempts to explain areas in which consumer behavior does not match traditional economic modeling. The areas that do not match traditional economic modeling (basic choice theory) can be described with the following questions:
? Why do some people unhappy even though they've had a pay raise?
? Why aren't all rich people happy?
? Why do people buy lottery tickets even if the probability is so low?
? Why do people give to charity if it doesn't increase the individual's income?
One of the main assumptions of the traditional economic model is that utility ...