Ilias Saidzada | 29.09.2025
Behavioral economics
Behavioral economics is a field of study that combines elements of psychology and economics to understand how people actually make decisions and behave in economic contexts. It challenges the traditional economic assumption that individuals are always rational decision-makers who seek to maximize their utility. Instead, behavioral economics argues that economic decisions are often biased and influenced by cognitive biases, emotions, social factors, and psychological limitations like bounded rationality and bounded self-control. This leads to deviations from purely rational behavior assumed in classic economics.
A recent example of Irrational economic decision making, is seen relevant to studies of small entrepreneurial firms, where groups norms, and social identity pressures heavily influenced decision making, which resulted in what is considered economically irrational behavior. Research from 2024 highlights how entrepreneurs from Kazakhstan sometimes may prioritize conforming to social norms and pressures, over the most economically sound decision. This often results in substandard business practices, since the main goal is Profit maximization. These decisions illustrate the behavioural economic concepts such as bounded rationality (Imperfect decisions due to limited mental capacity) and social conformity where firms or individuals may follow the same decisions made by other aka herd behaviour) which essentially override the pure economic calculation, this may cause firms to make choices that may not maximise profit or utility but instead focus on being in accordance with the social expectations and norms within the community they are in. (Global conference, 2024 Miami)
The most Traditional example of a firm making the sub optimal economic decisions is Kodak, and their failure to adapt to the changing economy and into the digital photography revolution, despite the fact that they had the most early access to the actual technology. Kodak was the first inventor of the digital camera in 1975, but chose to instead continue heavily focusing its resources on traditional film products regardless of their new invention, they did this due to the fear of the new product “cannabalizing” their current already profitable business, as the new invention would make traditional photography and film products less viable. Ultimately this decision, which was heavily influenced by Organizational Inertia, and incorrect optimism of the film industry, was an irrational form of economic perspective, as it ignored very clear market signs and technological advances.
The refusal from Kodak to pivot towards the new digital cameras early on, was the major causing factor of their decline in the market share and profitability. Eventually resulting in Kodak filing for bankruptcy in 2012. Although Kodak is a more historic example, rather than a recent one, it still clearly shows how behavioral economic concepts such as ; status quo bias, loss aversion, and organizational inertia, which all in all led to the irrational decisions which were clearly against the best interests of the company, decide the very clear ability to have a significant headstart.
This example clearly illustrates that although firms, having had access to the most recent, and relevant information, which points to a certain rational direction, make still may the irrational choice, due to faults such as biases, misplaced confidence in current market stability, and just the traditional fear of change, and the cost that comes with change, which all inevitable lead to the harsh negative consequences.
In contrast, Nortel, a previously major Canadian Telecommunication company, demonstrated a rational and future bearing strategic pivot during the late 1990s internet and “dotcom” boom. Originally Nortel had focused on the traditional telephone equipments as part of Northern Electric, creating the physical pieces for those phones as well, and being mostly built around that whole sector, But around the time before the boom of the internet, Nortel jumped the wagon, and early on invested around 30 billion dollars into internet infrastructure and the data networking acquisition, such as Bay networks, This was an extremely bold move, as this new internet and network, was essentially going to make their business disused, they decided it would be better if they themselves were the ones to "cannibalize" themselves. This quite risky move resulted in Nortel becoming one of the most dominant players in and around internet equipment, with around two thirds of all North American internet traffic being run through Nortel equipment by 2000. This resulted in astonishing positive figures, of a revenue double of 13 billion usd in 1996, to over 27 billion usd by 2000, with a market peak near 470 billion dollars, making the number one most valuable Canadian firm at its time. This example is a great showcase of how overcoming the mental and psychological barriers of status quo bias, and evolving together with the market and its innovations “rationally” being of major benefit. But this may not always be the case, as Nortel later also faced bankruptcy due to internal issues and a Dotcom crash.
A more local example, though vague due to lack of available information. In Kazakhstan, some small agribusiness firms recently made economically irrational decisions by heavily investing in traditional farming methods to align with social norms despite clear evidence favoring modern techniques. Driven by social conformity and bounded rationality, these firms suffered lower profits, reflecting how social and psychological factors cause deviations from rational economic behavior in real contexts.
These examples together demonstrate the power of behavioral economics to explain the decision making within the corporate world across various different contexts, from irrational adherence, to history changing products, to the rational innovation adoption, showing the incredibly complex and nuanced nature of the economic choices, because simply put, economics, is easy to understand only in ceteris parabus, but in the real world, the cognitive bias, social pressures, and the unpredictable market dynamics are ever changing.
A recent example of Irrational economic decision making, is seen relevant to studies of small entrepreneurial firms, where groups norms, and social identity pressures heavily influenced decision making, which resulted in what is considered economically irrational behavior. Research from 2024 highlights how entrepreneurs from Kazakhstan sometimes may prioritize conforming to social norms and pressures, over the most economically sound decision. This often results in substandard business practices, since the main goal is Profit maximization. These decisions illustrate the behavioural economic concepts such as bounded rationality (Imperfect decisions due to limited mental capacity) and social conformity where firms or individuals may follow the same decisions made by other aka herd behaviour) which essentially override the pure economic calculation, this may cause firms to make choices that may not maximise profit or utility but instead focus on being in accordance with the social expectations and norms within the community they are in. (Global conference, 2024 Miami)
The most Traditional example of a firm making the sub optimal economic decisions is Kodak, and their failure to adapt to the changing economy and into the digital photography revolution, despite the fact that they had the most early access to the actual technology. Kodak was the first inventor of the digital camera in 1975, but chose to instead continue heavily focusing its resources on traditional film products regardless of their new invention, they did this due to the fear of the new product “cannabalizing” their current already profitable business, as the new invention would make traditional photography and film products less viable. Ultimately this decision, which was heavily influenced by Organizational Inertia, and incorrect optimism of the film industry, was an irrational form of economic perspective, as it ignored very clear market signs and technological advances.
The refusal from Kodak to pivot towards the new digital cameras early on, was the major causing factor of their decline in the market share and profitability. Eventually resulting in Kodak filing for bankruptcy in 2012. Although Kodak is a more historic example, rather than a recent one, it still clearly shows how behavioral economic concepts such as ; status quo bias, loss aversion, and organizational inertia, which all in all led to the irrational decisions which were clearly against the best interests of the company, decide the very clear ability to have a significant headstart.
This example clearly illustrates that although firms, having had access to the most recent, and relevant information, which points to a certain rational direction, make still may the irrational choice, due to faults such as biases, misplaced confidence in current market stability, and just the traditional fear of change, and the cost that comes with change, which all inevitable lead to the harsh negative consequences.
In contrast, Nortel, a previously major Canadian Telecommunication company, demonstrated a rational and future bearing strategic pivot during the late 1990s internet and “dotcom” boom. Originally Nortel had focused on the traditional telephone equipments as part of Northern Electric, creating the physical pieces for those phones as well, and being mostly built around that whole sector, But around the time before the boom of the internet, Nortel jumped the wagon, and early on invested around 30 billion dollars into internet infrastructure and the data networking acquisition, such as Bay networks, This was an extremely bold move, as this new internet and network, was essentially going to make their business disused, they decided it would be better if they themselves were the ones to "cannibalize" themselves. This quite risky move resulted in Nortel becoming one of the most dominant players in and around internet equipment, with around two thirds of all North American internet traffic being run through Nortel equipment by 2000. This resulted in astonishing positive figures, of a revenue double of 13 billion usd in 1996, to over 27 billion usd by 2000, with a market peak near 470 billion dollars, making the number one most valuable Canadian firm at its time. This example is a great showcase of how overcoming the mental and psychological barriers of status quo bias, and evolving together with the market and its innovations “rationally” being of major benefit. But this may not always be the case, as Nortel later also faced bankruptcy due to internal issues and a Dotcom crash.
A more local example, though vague due to lack of available information. In Kazakhstan, some small agribusiness firms recently made economically irrational decisions by heavily investing in traditional farming methods to align with social norms despite clear evidence favoring modern techniques. Driven by social conformity and bounded rationality, these firms suffered lower profits, reflecting how social and psychological factors cause deviations from rational economic behavior in real contexts.
These examples together demonstrate the power of behavioral economics to explain the decision making within the corporate world across various different contexts, from irrational adherence, to history changing products, to the rational innovation adoption, showing the incredibly complex and nuanced nature of the economic choices, because simply put, economics, is easy to understand only in ceteris parabus, but in the real world, the cognitive bias, social pressures, and the unpredictable market dynamics are ever changing.
