List of Unsolved Problems in Economics - Behavioral Economics

Behavioral Economics

• Revealed preference: Does Revealed Preference theory truly reveal consumer preference when the consumer is able to afford all of the available options? For example, if a consumer is confronted with three goods and they can afford to purchase all three (A, B, and C) and they choose to first purchase A, then C, and then B - does this suggest that the consumer preference for the goods is A > C > B? The debate rests on the fact that since the consumer can afford all three goods and does not need to make a preferential decision, does the order of consumption reflect any preference?
• Tâtonnement: The act of tâtonnement plays a key role in the formulation of the general equilibrium theory. The claim is that if an initial contract does not lead to an equilibrium, they are ended and new contracts are formulated. If the initial contract is not called off, it will likely lead to a different price system, depending on the degree of error in the original process. The question is whether successive re-contracting continues with the parties forgetting the previously planned positions taken or whether the parties engage in a form of tâtonnement to achieve optimality? See Also: Hill climbing and Walrasian auction
• Unified Models of Human Biases: The majority of economics has concentrated on the development of models that reflect an idealized economic agent, sometimes referred to as Homo economicus, as a way of studying economics. In the period spanning the 1970s to the 1990s, research began to emerge that suggested that people were subject to cognitive biases such as the framing effect, loss aversion, the gambler's fallacy, confirmation bias, and many others. Further, these effects could produce anomalies such as herd behavior or momentum investing inconsistent with economic models that did not incorporate human psychological limitations. While some models have begun to include bounded rationality and risk aversion, such as Prospect Theory, there still remains to be seen a unified model that can make useful predictions that incorporates the entirety of cognitive biases and rational limitations in most humans. Further, there even exists debate as to whether it is necessary to incorporate such psychological limitations into economic models. While some economists insist they are necessary to fully appreciate the complexity of the market, others still contend that a model that incorporates human biases is either unrealistic or question its usefulness arguing that a model that doesn't approximate agents as being perfectly rational, with the possibility of minimal exceptions, is unlikely to be successful.