Article review Financial Strategy

Review Article:
Thaler, Richard H. 2018. "From Cashews to Nudges: The Evolution of
Behavioural Economics." American Economic Review, 108 (6):
https://www.aeaweb.org/articles?id=10.1257/aer.108.6.1265
Please provide a brief review of the paper and state your own opinion
about the following question with supporting theories, research, or
statistics.
“In March 2020, global equity markets including FTSE100 and S&P500
showed significant crash due to increasing concern about COVID-19
pandemic. While some investors think this drop was a rational reflection of
increasing systematic risk of economy, the others regard it as an irrational
over-reaction due to amplified fear about the disease. Which one do you
think is more compelling?”
The suggested proportion of the paper, review part is 1/3 of the assignment, and
2/3 for your own view part. Referring to relevant literature to explain your
viewpoint is a very important part of this coursework (Harvard Referencing)

Answer

Introduction

People have different behaviors that lead them to make irrational and rational decisions.
These decisions confirm them in acting in specific ways. Behavioral economics is a diverse topic
on why people behave in particular ways. Behavioral economics assesses why individual
decisions or choices are different from what other people opt. Economists have embarked on
extensive research projects on this topic as times have shown that people are changing by the
day, and previous economist's theories being ratified to their amusement (Pendleton et al., 2019).
Different scenarios or cases call for individual decisions. However, there are two types of
decisions that can be made. The rational and irrational decision approaches. People are generally
rational and make decisions based on what outcomes they have in their lives. People opt on
maximizing utility and thus make confident decisions based on the utility it achieves. People
always want to bring a positive change in their lives, making decisions having a close watch on
their lives.
A rational decision is a decision made after critical consideration and assessment of a particular
event to achieve utmost satisfaction. An irrational decision is a decision made in haste. These
decisions are generally impulsive and lead to adverse outcomes in the end. These decisions are
not analyzed, considered all aspects, and not goal-oriented (Pendleton et al., 2019). They are
risky decisions that have a chance of causing harm instead of positive results. Such choices have
less opportunity and are usually dangerous. People also make decisions from emotional
perspectives. Emotions influence a lot on decisions made. Economists have previously
determined that decisions are made from personal views.

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Article Review

This article surveys the advancement of conduct financial aspects. Conduct financial matters
have been under gigantic investigation as individuals attempt to contend why individuals have
various sentiments on things and wind up creating such choices. The articles consider a gathering
of companions at a meeting (Thaler et al., 2018). These visitors have alternate points of view and
assessments on explicit issues. A case situation is as they trusted that supper will be prepared, the
inviter considered serving cashews nuts with drinks. When the nuts were on the table, the visitors
welcomed had just eaten a giant piece. The inviter decided to move the nuts from the table, and
to his satisfaction, all the visitors had a similar appraisal.t. Such has impelled the conceptualizing
of what occurred. The boggling point was, "the clarification did they all concede to that choice."
such is a condition that individuals are gone facing dependably. In as much as the nuts stayed at
the table, the guests would have continued eating them; regardless, they were glad that the nuts
had been moved from the table. A severe fan choice isn't typical (Thaler et al., 2018).
Many of these guests considered that they would not have the hunger to have the supper arranged
had they kept eating. Such is a reasonable choice that they made. An unreasonable individual
would have kept eating, not aware that his/her craving would be lost, consequently not having
supper. A sound leader, for example, the guests considered that the fundamental objective was to
have supper and not the nuts; in this manner, the nuts filled in as starters or a fair by the path as
they sat tight for food (Pendleton et al., 2019).

A comparable case has been a wine sweetheart who sold wine. The wine cellar had a selling cost
of 30 dollars for a container and had 100 dollar bottles in his bureau. In any case, he never sold

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the 100 dollar bottles as he named them as deviation from his business approach. These 100
dollar bottles were kept in his bureau that he devoured during significant events. These two cases
portrayed peculiar conduct among individuals. This further raised why individuals, for example,
the wine darling pick not to make benefits but rather have his fulfillment from the wine (Thaler
et al., 2018).
These situations and many more stories drove the article essayist to leave on a progression of
examination and past financial analysts' speculations to have an away from social, economic
aspects

Judgment under Uncertainty

People are uncertain, as so are events in the world. Certain circumstances happen or occur,
calling for instant decisions to be made. These decisions impact the outcome of the event or the
extent to which the event is handled. People often love predicting future event outcomes. These
predictions about certain events in the future are the judgments under uncertainty. This entails
making a judgment, yet one is uncertain about an event or occurrence. These predictions lead to
people either having a rational and irrational approach. The outcomes from these predictions
made depict those willing to take risks or don't care about the risks involved or those that
critically consider their chances before deciding about something.
These different predictions portray economists' theory that people exhibit bounded
rationality. People make predictions about events or issues based on a lot of factors. These
factors serve as a measure of what the decision made will have in output and how the decision
benefit them (Thaler et al., 2018). These integral factors lead to decisions that might not look
substantial, whereas they are significant.

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Understanding Cashews: The Planner and the Doer.

In economics, there exist two kinds of people. There are the planner and the doer. The planner is
the person that analyses all components before making any decision. He/she plans before doing
anything, thus ensuring that his plans act as the basis or measurement tool of the analyzed
decision. Usually, the planner always ends up with positive results. A doer, on the other hand, is
a person who does things with planning or consideration. The doer is a high-risk taker who has
no care attitude or is very optimistic about the future outcome.
Humans suffer from self-control issues. Self-control is a critical component in decision making,
as seen in the story of friends being invited for dinner and was served with cashew nuts as dinner
was yet to be cooked. The planner thought of giving his visitors a bowl of nuts to keep them busy
as they waited for dinner. As later seen, the planner envisaged a self-control issue as a reason for
moving the bowl of nuts away from the table (Thaler et al., 2017). The visitors felt indebted not
to continue eating the nuts and instead wait for dinner. Similarly, a scenario whereby the planner
decides on taking a particular decision that implants a guilt sense in the doer. This sense of guilt
causes the doer to halt or consider his decision again.
Naturally, doers enact decisions that are giving positive yields in the shortest possible time.
However, these decisions are costly and can finish all resources available. Imputing a guilt sense
in the doers' planners can monitor and stop doers from completing all available resources.
Planners yearn to maximize results in the long run. Long run, positive results are sustainable and
maximize utility. As people indulge in making decisions, they should be conscious of the self-
control aspect. The limitations of this strategy are the costs involved. This guilt incense aspect
consists of many expenses as it takes a lot of time to enact.

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Mental Accounting

Mental accounting is the aspect of having accounting systems that help record and analyze
transactions and data collected. Organizations face enormous challenges and hurdles in choosing
accounting system structures compatible with the organization's business ideal (DellaVigna.,
2018). The accounting system allows the managers to monitor the spending activities of his/her
employees and offer incentives where applicable. Another case example is Individuals and
households that adopt a similar approach to handle their financial affairs. Mental accounting
systems in such a home has mental budgets on different entities such as foodstuffs and
expenditures. The family might opt for a savings and retirement account. This is where they keep
some funds that will be used in the future or emergency instances.
Behavioral Aspects and Finance.

Humans are strange and difficult to understand. They make decisions that may look absurd and
uncalled for. However, these decisions are motivated by many factors and behaviors. Behaviors
of peoples are different naturally. This indifference in actions is catalysts of rational and
irrational decisions. From the planner and doer scenario, these two people may have other
behaviors and take different approaches to issues (Kahneman et al., 2003). The planner might
have a particular action that calls for him to analyze and plan before undertaking any case. In
contrast, the doer has a behavior that calls for him to take risks or make impromptu decisions
without consideration.
Finance is another aspect of behavioral economics (Thaler et al., 2016). People are financially
abled differently; thus, the wealthy, middle class, and inferior norm. These three classes depict
the financial capabilities of people. It has been outplayed that people with financial stability are

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usually associated with good behavior. In contrast, financially unstable people are deemed
immoral in behaviors/.finances outlays people's living standards and capabilities.

Question Scenario

Global equities markets are decreasing as covid 19 approaches. This has been coupled with the
increasing concern of the covid 19 pandemics. Investors have had different opinions as to why
the markets are behaving so. Some have had a rational outlook of the issue, whereas others have
adopted an irrational view in making their arguments against the decrease in equity stock
markets. The analytical perspective is that the occurrence of the equity markets' crashing was a
predicted outcome, thus not an emergency due to the health pandemic looming. The irrational
outlook is that the crashing of global equity markets is attributed to the world's impending health
pandemic (Kahneman et al., 2003).
I will take the rational reflection as the correct explanation or reason for the crash in the global
equity markets. The world has been experiencing a fall in the stock markets. The recent stock
market reports have depicted the situation as dropping. The leading cause for the current unstable
world stock markets is that the world has been marred with many challenges, including elections
and political instability issues. Political instability has hit hard the global equity markets as the
trade players are engulfed in battles in their countries, thus not participatory in the markets'
growth. Political instability has led to the withdrawal of significant trade entities and the lockout
of many products being sold in the global markets (Sunstein., 2013). Similarly, many companies
have had to shut down or change the location for security reasons in different countries such as
Mali, whereby rivaling groups or pacts have turned the country into a warzone.

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Another major cause of the crashing of global equity markets is poor strategic and uncertain
decision making. In recent times, the major world trade players have enacted unconsidered
decisions that significantly hurt the world economy. A case example is the tax cuts policy
enacted in the USA. The tax cuts policy was uncalled for and unconsidered as they were made to
maximize utility. America wanted to grow its economy through enacting strict sanctions on
products that can be produced in America. This tax cut policy has led to a drop in sales of
products in the world markets. This predicament has gone to the extent of disrupting peace over
the globe. This is just an indication that the health pandemic is not the root cause of the crash in
global equity markets. These scenarios show a reflection of events happening simultaneously.
These events have disrupted the world market. The health pandemic is just but a tip of the
iceberg on an already dying world stock market (Bhargava et al., 2015).
Covid 19 has dealt an enormous blow to the world markets. However, the many hits on the needs
show unprepared people. People did not view covid 19 as a pandemic but just as a flu wave that
will not humble the world to its knees. This led to no predictions on future events. Covid 19 has
swept the world by storm. Businesses have been shut down promptly as investments have been
collapsed and destroyed. These atrocities have hit the world on all corners showing a world that
was not analytical on making to safeguard their investments from the looming health pandemic
(Bhargava et al., 2015).
Rational prediction depicts an accurate analysis of the global equity markets state. Many
investors who were critical analysts withdrew their investments or cautioned their investments.
They had already seen how the global market was performing. Upon the occurrence of the health
pandemic, they had already safeguarded their assets. The irrational thinkers took a major on their

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investments as they enjoyed short-lived pleasures in the world market, not cognizant of the long-
run impact to be seen (Posner et al., 1998).
The norm that people are different is denoted clearly. People exhibit a further understanding of
situations and offer other causes and solutions. This indifference in decision making is seen in
the planner and doer situation.

Conclusion

People will always exhibit different opinions and have a further understanding of events. This
indifference is the primary catalyst to rational and irrational decision making. Behavioral
economics depicts a study of why people make decisions and what influences the decision-
making process. As seen, people make decisions, either rationally or irrationally. These decisions
are influenced by society. Cognitive, physical, emotional, and behavioral factors. These factors
play a significant role in influencing how people view things and the decisions they make.
People are driven by what happens or is affecting their lives either at the moment, the past, or the
future.
People are predictive (Altman., 2016). Most people want to know what a situation they are in
now will be in the future. People are known to maximize utility. With this in mind, people tend
to predict or make a forecast of events. They do so to have an overview of how this situation will
pun out. Predictions are not real happenings but assumptions that can either happen or fail to
occur. This means that these predictions and beliefs might fail and, in turn, causes losses or harm
to the people. It's essential to have a critical approach to prediction or forecasts. These forecasts
need clear assessment and analysis and a plan on how to undertake the situation in question.

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Conclusively people exhibit self-control as a significant limitation on people's choices and
decisions. Self-control entails having the inner attribute of controlling events happening to
oneself. People tend to make individual decisions when not in the right state (Baran et al., 2017).
Having self-control is a colossal challenge amongst people. Decisions made when not in control
are usually risky and most likely to fail or end up hurting others.

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References

Altman, M., 2016. A bounded rationality assessment of the new behavioral economics. In
Routledge handbook of behavioral economics (pp. 179-193). Taylor & Francis.
Baran, P. and Markowicz, I., 2017, November. Behavioral Economics and Rationality of Certain
Economic Activities: The Case of Intra-Community Supplies. In International
Conference on Computational Methods in Experimental Economics (pp. 285-299).
Springer, Cham.
Bhargava, S., and Loewenstein, G., 2015. Behavioral economics and public policy 102: Beyond
nudging. American Economic Review, 105(5), pp.396-401.
DellaVigna, S., 2018. Structural, behavioral economics. In Handbook of Behavioral Economics:
Applications and Foundations 1 (Vol. 1, pp. 613-723). North-Holland.
Kahneman, D., 2003. Maps of bounded rationality: Psychology for behavioral economics.
American economic review, 93(5), pp.1449-1475.
Pendleton, A., Lupton, B., Rowe, A., and Whittle, R., 2019. Back to the Shop Floor: Behavioural
Insights from Workplace Sociology. Work, Employment and Society, 33(6), pp.1039-
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Posner, R.A., 1998. Rational choice, behavioral economics, and the law. Stanford Law Review,
pp., 1551-1575.
Sunstein, C.R., 2013. Nudges. Gov: Behavioral economics and regulation. Forthcoming, Oxford
Handbook of Behavioral Economics and the Law (Eyal Zamir and Doron Teichman
eds.).

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Thaler, R.H., 2017. Behavioral economics. Journal of Political Economy, 125(6), pp.1799-1805.
Thaler, R.H., 2016. Behavioral economics: Past, present, and future. American Economic
Review, 106(7), pp.1577-1600.
Thaler, R.H., 2018. From cashews to nudges: The evolution of behavioral economics. American
Economic Review, 108(6), pp.1265-87.