Public Finances

Fiscal policy is a branch of economic policy that sets the budget, and its components, government spending and taxes as control variables to ensure and maintain economic stability, cushioning the fluctuations of economic cycles and helping to maintain a growing economy, full employment and without high inflation.

Framework

The financial activity of the state plays in modern societies three basic functions, a function of resource allocation, a redistributive function and a stabilizing role. By the mapping function, the State provides goods that, under certain circumstances, the market does not provide adequate due to the existence of so-called market failures. The redistributive role of the state, tries to reconcile the differences that occur between the distribution of wealth that makes the market system and distribution society considers just, that involves ethical, political and economic. The stabilizing function, which is part of fiscal policy, try to get financial system stability and to avoid imbalances and bring the necessary adjustments in aggregate demand in each case to overcome situations of inflation or unemployment.

Objectives end of the fiscal policy

As stated above the main objectives of all fiscal policies are:

• Accelerating economic growth.
• Full occupation of all the productive resources of society, both human and material and capital.
• Full price stability, defined as the general price indices do not suffer significant elevations or reductions.
  

Behavioural finance

Behavioral finance and behavioral economics are nearby fields that apply scientific research in cognitive and emotional tendencies and social human for a better understanding of economic decision making and how they affect market prices, returns and the allocation of resources . The fields are primarily concerned with rationality, or lack thereof, of economic agents. Behavioral models typically integrate insights from psychology with neo-classical economic theory. Recently, neuroscience has joined the alliance, allowing to study the neuroanatomical and neurophysiological bases of economic behavior, conforming and the new science of neuroeconomics.

The trials are mostly concerned with the effects of market decisions, but also with public choice, another source of economic decisions with some similar trends.

History

In classical economics, economic theory had a close relationship with psychology. For example, Adam Smith wrote an important text describing psychological principles of individual behavior, The Theory of Moral Sentiments and Jeremy Bentham wrote extensively on the grounds of utility. Economists began to distance themselves from psychology during the development of neoclassical economics as they sought to reshape the discipline as a natural science, with explanations of economic behavior deduced from assumptions about the nature of economic agents. The concept of homo economicus was developed and the psychology of this entity was fundamentally rational. However, psychological explanations continued to inform the analysis of many important figures in the development of neoclassical economics, such as Francis Edgeworth, Vilfredo Pareto, Irving Fisher and John Maynard Keynes.

Psychology had long since disappeared from economic discussions in the middle of the twentieth century. Several factors contributed to the resurgence of its use soon after and the development of behavioral economics. The models of expected utility and discounted utility began to gain wide acceptance, generating testable hypotheses about decision making under uncertainty and intertemporal consumption respectively. A number of observed and repeatable anomalies challenged those hypotheses. In addition, during the 1960s cognitive psychology began to describe the brain as a device information processing (in contrast to behaviorist models). Psychologists who specialize in this field, such as Ward Edwards, Amos Tversky and Daniel Kahneman began to compare their cognitive models of decision making under risk and uncertainty to economic models of rational behavior.

The publication is probably more important in the development of behavioral finance was written by Kahneman and Tversky in 1979. This document, "Prospect theory: Decision Making Under Risk ', used cognitive psychological techniques to explain a number of documented anomalies in rational economic decision making. Other milestones in the development of this field included several popular lectures at the University of Chicago (see Hogarth and Reder, 1987) and in 1997 a special edition of the respected Quarterly Journal of Economics devoted to the topic of behavioral economics.