Background
Anomalies in economics refer to deviations from the standard predictions of traditional economic theories, primarily those grounded in rational choice and the axioms of preference. These deviations are identified when individuals or groups make economic decisions that cannot be explained through classical or neoclassical models.
Historical Context
The study of anomalies gained prominence in the late 20th century as economists began to notice patterns in decision-making that conflicted with the expected utility theory and other well-established models. Notably, the work of psychologists Amos Tversky and Daniel Kahneman on cognitive biases laid much of the groundwork for understanding economic anomalies.
Definitions and Concepts
Anomalies are economic choices that deviate from what is predicted by standard economic theories. Unlike decisions based on rationality and optimization, these choices can include under-saving for retirement, purchase of lottery tickets with a negative expected return, and other seemingly irrational behaviors.
Major Analytical Frameworks
Classical Economics
Classical economics largely ignored anomalies, as the focus was on macro-level theories such as the invisible hand and market equilibrium which assumed rational behavior.
Neoclassical Economics
Neoclassical economics further developed models such as utility maximization that assume individuals make rational choices. Anomalies were seen as outliers with minimal impact on overall predictions.
Keynesian Economics
While Keynesian economics did account for irrational behaviors and market imperfections to some extent, it did not focus on anomalies as a primary subject of study.
Marxian Economics
Marxian theories often attributed economic disorders and irrationalities to class conflicts and structural factors rather than individual irrational behaviors.
Institutional Economics
Institutional economists consider the role of institutions, using more encompassing approaches that may accommodate some instances of anomalies but not focusing on them explicitly.
Behavioral Economics
Behavioral economics arose specifically in response to anomalies. It integrates insights from psychology and economics to create models that better predict human behavior. It relies on empirical data and controlled experiments to understand why people deviate from traditional economic predictions.
Post-Keynesian Economics
Post-Keynesian economists focus on uncertainties and the role of expectations in influencing behavior, integrating some elements of behavioral economics’ focus on irrational behaviors.
Austrian Economics
Austrian economics incorporates the unpredictability of human actions and the subjectivity of value but has not focused specifically on empirical anomalies.
Development Economics
Development economics sometimes incorporates behavioral insights to better understand why certain populations make economic decisions that traditional models might not predict.
Monetarism
Monetarism, focused on the role of government monetary policy, does not account for anomalies explicitly but is influenced by deviations from rational expectations.
Comparative Analysis
Anomalies challenge the foundational assumptions of rational economic decision-making, which are core to classical and neoclassical theories. The varied approaches taken by schools like behavioral economics show a more nuanced understanding of human behavior, providing a more accurate framework for certain economic predictions.
Case Studies
- Under-saving for Retirement: Empirical studies show that many people save significantly less than is economically optimal for their retirement, contradicting standard models of rational planning.
- Lottery Ticket Purchases: Consistent purchase of lottery tickets despite their negative expected return is another example of an anomaly, driven by cognitive biases like overestimating small probabilities.
Suggested Books for Further Studies
- “Thinking, Fast and Slow” by Daniel Kahneman
- “Predictably Irrational: The Hidden Forces That Shape Our Decisions” by Dan Ariely
- “Misbehaving: The Making of Behavioral Economics” by Richard H. Thaler
- “Anomalies and Rationality in Economics” by Suren Basov
Related Terms with Definitions
- Cognitive Bias: Systematic patterns of deviation from norm or rationality in judgment.
- Expected Utility Theory: A theory that assumes individuals choose options with the highest expected utility.
- Prospect Theory: Describes how people make decisions in situations of risk and uncertainty, highlighting deviations from the expected utility theory.
- Allais Paradox: A situation that contradicts the expected utility hypothesis by showing that people’s choices violate the independence axiom.
This dictionary entry aimed to provide a comprehensive understanding of the term “anomalies” in economics, its significance, and its evolution throughout various economic schools of thought.
