Behavioural Economics

Behavioural economics differs from neoclassical economics in its assumption that the realism of behavioural assumptions are of analytical consequence to the accuracy of a theories predictions. Behavioural economics is therefore distinguished by its efforts to test for the empirical validity of a theory's behavioural assumption and to determine the analytical and policy related significance of introducing more realistic assumptions into standard theory. Behavioural economics has been applied to a number of different branches of economics. Integrated into individual choice theory has been the fact that individuals tend to work with incomplete or imperfect information and are bounded by their cognitive abilities, and therefore can not always know what the utility maximising choice is. Leibenstein has introduced the concepts of efficiency wages-that effort is a positive function of wages, and x-inefficiency, when a firm's productivity deviates from the ideal. Psychology is also closely related to behavioural economics which borrows heavily on human behaviour discovered by psychologists, and experimental economics plays an important but more peripheral role