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Behavioral Economics For Dummies® by Morris Altman, PhD

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Chapter 2

Getting Real about Assumptions

In This Chapter

arrow Understanding economic models

arrow Unveiling how traditional economists regard assumptions

arrow Introducing reality to economic analysis

arrow Uncovering the meaning of rationality

arrow Knowing why assumptions matter for economic inquiry

Behavioral economics differs from conventional approaches to economics in one key way: In behavioral economics, the realism of assumptions matters big time. Behavioral economists pay special attention to how realistic their psychological, sociological, and institutional assumptions are. Many contemporary behavioral economists pay particular attention to the psychological assumptions introduced into economic models and how these assumptions help explain economic behavior.

In behavioral economics, realistic assumptions are critical in building economic models that help us analyze the world. Such assumptions also allow us to better understand how people behave when making decisions — which types of decisions result ...

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