Why do behavioral economists consider it helpful to base a theory of economic behavior on the actual mental processes that people use to make decisions? Why do neoclassical economists not care about whether a theory incorporates those actual mental processes?

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7 Jun 2023

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Related questions

9. Behavioral economics

Indicate whether each of the following examples of behavior is consistent with the way traditional economic framework suggests people should act, or if it is reserved for behavioral economists to examine.

Example	Consistent with the Predictions of Traditional Economic Models	Reserved for Behavioral Economics
Some people choose to work fewer hours after receiving a raise at work.
Some people sacrifice disposable income to help their children pay for college.
Some people care about how much money they make relative to other people rather than their absolute level of income.
Some people treat $100 they earn differently from $100 they receive as a gift.

rubymuskrat850

An economic model is

	a means of empirically testing an economic theory.
	a generalization about the workings of an abstract economy.
	a commonly held economic insight stated as a law or general assumption.
	a framework that places the generalized insights of a theory in a more specific contextual setting.

What besides a model do economists need to make policy recommendations?

	Economists need to understand the empirical evidence supporting the theory as well as real-world economic institutions to make policy recommendations.
	Economists also need to know the assumptions on which the model is based to make policy recommendations.
	Economists need to understand the empirical evidence supporting the theory to make policy recommendations.
	Economists need to understand the empirical evidence gathered through testing the model.

Case Study: Mental Health Parity

Presenting to the board, Chris spoke with passion. Our insurance plan should provide the same coverage for mental health services as for other medical services. It's the right thing to do, and it's good business. If our employees or their dependents have untreated mental health problems, the employees become less productive and waste money getting treated for other stuff. Thank you, Chris, said Kerry, the company's CEO. This is an important question for us, and the Benefits Committee will carefully consider it. After Chris left the room, Kerry turned to Jordan, the director of human resources, and said, Jordan, what's your take on this? There are actually two questions here, said Jordan. First, how elastic is the demand for ambulatory mental health services? How much will the use of mental health services increase if coverage improves? Second, how effective is mental health care? This second question is the more important one because good mental health care can have such powerful effects. Now, a number of studies have concluded that the use of mental health services is more price-sensitive than the use of other ambulatory care. Analyses of ambulatory mental health services have found elasticities ranging from 0.44 to 1.00. These results could be statistical flukes. Consumers who expect to use mental health services may choose insurance plans that offer generous coverage for those services. However, the RAND Corporation researchers Keeler, Manning, and Wells in 1988 used data from the RAND Health Insurance Experiment, which randomly assigned respondents to insurance plans, to resolve this issue. The RAND analysis generally confirmed that the demand for mental health services is more price-sensitive than the demand for general ambulatory medical services. Demand for each is inelastic, but the elasticity for mental health services is 0.8 and the elasticity for other outpatient services is 0.3. Most consumers will not use any mental health services, but plans that offer generous mental health benefits will cost more. We can't ignore this. I'm confused, said Addison, an internist on the board. In 2012 McConnell and colleagues published a study showing that Oregon's law requiring mental health parity in commercial insurance plans had little effect on spending. How could that be? Real-life appears to be contradicting the RAND study. I'm sure the plans for federal employees used managed care techniques to control spending, Jordan jumped in. And mental health spending isn't the issue. The issues are what happens to other healthcare spending and what happens to our workers. I'm pretty sure there's good evidence showing that effective mental health treatment can reduce other costs and improve productivity.

Discussion questions:

Why does it matter whether demand for mental health services is more elastic than demand for other services?

The price elasticity of demand for ambulatory mental health services appears to be about 0.8, and the price elasticity for general ambulatory medical services appears to be about 0.3. How much would spending increase for each type of care if copayments were cut from $40 to $25?

What managed care techniques do insurers use to control spending?

Is there evidence that better treatment of mental health problems reduces other spending?

Is there evidence that better treatment of mental health problems improves productivity?

What is your recommendation to the Benefits Committee?