IMPACT
OF BEHAVIORAL FACTORS
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Impact of prospective
theory
The
studies conducted in the recent past have demonstrated significant concerns
about the illustration and the provisions of taxation and the change in the
behavior of the general population. The changes in the behavior of the entire
population has adverse effects in the implementation of government polices the
taxation policies. Tax is used by the federal government as the incentive for
generating revenue that’s crucial for the government budget. Behavioral factors
have immense influences on the implementation of successful policies on
taxation and this has prompted the likelihood of taxation failures. According
to the depiction from the studies conducted, the elements of behavioral change
have resulted in the invention of different taxation approaches. The aspects of
behavioral change theories have stated that the population is more contented
with the gains than with the losses. The usage of prospect theory is critical
and it states that people have different valuations for the gains and losses of
the same margin. This theory has been highlighted as the economic theory that
describes the way people chose between probabilistic alternatives that involves
risks. Generally, the probability outcomes of these aspects are kwon to the
participants of the theory (Daniel Kahneman,
2008). Because of the differences in the perceived differences in the
gains and losses, the theories have shown that there is more likeliness for the
population to deviate towards the increases while they are relevant to adapt
the issues of decline because this forms an incentive of losing their shares.
In reality, the aspects of irrationality are clearly demonstrated where the
consumers have identified as utility maximizes and always pursuing their
personal gains. The pursuit of personal gains results in the alterations of the
population thereby leading to the alteration in the implementation of the
policies.
Over the period, the aspects of alterations in human behavior
have been of immense influence on the consideration of implementation of
taxation policies. This incentive follows the depiction of the fact that the
general population has critical values for the gains than for the losses of the
same margin. Generally, the attributes
of irrationality are depicted through the analysis of the sentimental self
interests that are depicted in the elements of taxation policies (Farnham, 1994). As mentioned above, taxation
is an incentive that used by the government to control the consumption of
specific substances in the economy. Some of the substances that may experience inclusion
of taxes are the elements of tobacco and alcohol consumption and the motive for
imposing the taxation these incentives is to enhance control of their
consumption. One of the leading aspects for the notification of the attributes
is the consideration of the constant changes in the element of population
behavior with regards to the aspects of government taxation policies (H. Kent Baker, 2010). The attributes of self consideration
are the leading propellants for the rejection of the taxation because the
perceived outcomes of the taxes are viewed as having negative influence on the
population.
The outcome of the taxes introduced in the economy are
responsible for the creation of opportunities in the economy and special
consideration should be given to the taxes that are introduced as larger
amounts at once rather than the incremental taxes. Over the period, the
elements of taxation in the economy have continued to represent the aspects of
risks and opportunities that should be considered in the economy. The prospect
theory is one of the economic theories that are of critical benefit in the
illustration of taxation and this application
(Hielke Buddelmeyer, 2007). This theory is crucial in enabling the
general population to ascertain the usage of taxation and some of the
attributes that leads to the aspects of economic development. There are factors
that are critical in explaining why people prefer the gains than the losses in
the economy.
According to the disposition effect, people dislike the
aspect of incurring losses much more than they like the gains. In this regard,
people often gamble for the deviation of risks that area associated with losses
and this is demonstrated by the elements of investors who hold their stocks and
wait for the gains to emerge before selling their proceeds. With regard to the
attributes of taxation, the introductions of taxation policies in the economy
have the attribute of encouraging the population to sell the items whose prices
results in losses after the tax effect because therein is the fear of extra
losses on the gadgets. This is considered to be ideal because it has the
attribute of reducing the amount of owed capital gains. It is beneficial t
consider that taxation has significant effects in the value of the stocks and
the research conducted has revealed that the investors hold losing stocks for a
median of 124 days while the winning stocks are held for 104 days (Jeffrey John Rachlinski, 2010). The reports
collected from the holders of the losing stocks have stated that the losers
hold the losing stocks on a longer period basis because they expect value
appreciation. The changes in behavior are critical and have significant effects
on the establishment of taxation policies because it may influence the
consideration of tax advantage or tax losses. The depiction of the economic
records has shown that the investors have ideal chances of incurring tax
advantages through the aspects of selling the losing stocks. The reluctance of
the population to incur losses indicates an aspect of saving the taxes.
Equity equilibrium is another incentive leading to the
enhancement of changes in behavior regarding the implication of taxation
policies. The establishment of equity equilibrium is in collaboration with the
provisions of prospect theory that highlights the effects of the gains and the
losses on the changes of behavior and it is critical in ranking the gains and
losses separately. Generally, the negative attitude towards the establishment
of taxation losses has the attribute of altering the provisions of population
behavior (Jorgenson, 1996). Ideally, the
losses and gains have different consideration n the implication of the general welfare
and this calls for the intervention of corrective measures to help in the
eradication of the loses and the critical aspect concerns the consideration of
the elements leading to the recurrence of looses. The gains have the attribute
of enhancing the realization of social welfare while the losses have the consideration
of reducing the realization of the welfare of the population. The general
population is composed of the individuals with the aim of enhancing their
welfare and this explains the attribute of rejection of losses because they aim
to maximize their welfare. The central concern of the tax policy is derived
from the analysis of the effects of taxation and this involves the
determination of the dead weight loss and incidence (Jorgenson, 1996). The elasticity considering the changes in
behavior and the alteration in taxation policies are clear objectives that
results in the consideration of the taxation effects. The analysis of the data
from the behavioral economies has stated that the responses to taxation are
influenced by the model and the purpose of the taxes. This has also stated that
irrational people in the economy have definite response of the taxes and has
effects on the consideration of taxation simplicity. Therefore, the government
should consider these attributes before the implementation of the tax policies
because they are of immense benefits to the consideration of consumer welfare.
The establishment of welfare is one of the leading incentives that enhance
satisfaction. Reduction of welfare is caused by losses due to taxation hence
the rejection of periodic taxes.
The platform for the implementation of policies is
largely provided by the existing human behavioral factors. The implementation
of taxation policies are based on various attributes that includes practical
aspects, economic and the definition the ideal tax policy. Various people have
different responses to the provisions of different taxes and this has the
effect of enhancing changes in behaviors. The element so behavior changes shows
that incremental tax designs are some of the policies that are discouraged
through changes in behavior (Kaa, 2008).
This incentive is opposed to the huge taxes levied on substances like the
taxation on the usage of carbon that is levied once. The aspects of incremental
taxation have continued to reject by the population because they are perceived
to be the cause of reduction in the consumer welfare. Finally, the behavioral
economics considers the elements of policies in terms of the usefulness on the
taxes and their fiscal stimulus. The understanding of this incentive is
beneficial for the enhancement and adoption of taxation policies in the
economies. Examples of the taxes that have been implemented in the last 15 years
includes the consideration of tax on tobacco consumption and the motive was to
increase the prices of the substances by 10% and finally reduce the consumption
of the commodity between 1.2% and 3.36%
(Kirchler, 2007).
The consideration and the adoption of prospect theory has
proven to be extremely ideal in the establishment of future consideration of
the taxes to be adopted in the economy because it helps in highlighting the
elements of behavioral changes with regard to the aspects of behavioral factors.
The above factors highlighted are crucial in enhancing development of the
economy because it enables understanding of the possible factors that enhances
changes in the population. One of the critical lessons from the elements of
prospect theory is the consideration of understanding the welfare of the
consumers and the contribution of that taxation employed towards the
realization of overall economic performance. It is extremely beneficial for the
federal government to consider the welfare effects of the taxation policies
adopted because this has the effect of changing the behavior of the population.
Changes in the behavior of the general population are critical as it involves
the attributes of taxation notification and development (Wakker, 2011). The aspects of taxation applied in an economy have
crucial concerns for the adoption of investor performance. Taxation has ideal
influence on the prices of the stocks and this propels the investors to hold
the stocks or sell the stocks with the view of making an additional
earnings.
The aspects and depictions of this prospect theory have
been used in decision making because they have the attribute of helping the
investors in the need to ascertain the risks in investments. Over the period,
the elements of investments have always been characterized by the attributes of
risks and gains and these aspects of risks are adverse because they lead to the
reduction in welfare of the investors. Therefore, the investors have found the
usage of the system to be extremely beneficial because it helps in the making
of decision regarding the profitability of their investments. In reality, this
theory has continued to be beneficial because it has the aspects of assisting
in the collaboration of judgment about the external and internal factors that
influence performance. The attributes of basing decisions is in accordance with
the analysis of the tradeoff and benefits where the benefits depicts gains
while trade off depicts the losses. The acceptance of benefits is based on the
consideration it increase the welfare of the population.
Normally, future expectation has immense influence on the
demand and investments of the population. The attributes of expectation are the
driving factors leading to the initiation of the investment decision and this
consideration has the attributes of enhancing realization of regional benefits
of the taxation policies. In view of the economic impacts, the taxation
policies enacted have the consideration of enhancing changes in the welfare of
the population. In this regard, the population should consider the possible
outcome of the prospects before the implementation of the policies. This aspect
has an influencing the realization of behavioral change and it results in the
implementation or rejection of policies. The policies implemented must be able
to enhance the realization of welfare benefits as proposed by prospect theory (Wakker, 2011). Therefore, this analysis is
extremely crucial because it enhances the understanding of key factors that
leads to the alteration of population behavior. Generally, the theory
highlights the factors that help in the consideration of irrationality
practices. Irrational population has aspect of adopting policies that are
geared towards enhancing self satisfaction and benefit maximization. The usage
of this policy ideally specifies that irrational population maximizes their own
welfare and have limited regards for the welfare of the society. In view of
this realization, the irrational population always has the tendency to avoid
the impacts of the losses because it reduces their net worth. On the other
hand, the deviation towards the benefits is extremely considered because it
increases the personal benefits and returns.
The evidence collected from various economic researches
has revealed that people have more preferences for the gains than the losses
and they perceive gains more than they perceive losses. A confirmation of this
incentive is that fact that when a person is presented with two options that
projects gains and losses but with equal economic compact in the long run,
majority of the individuals will choose the option with gains. The explanation
for this incentive is that losses are associated with significant emotions than
the gains. Taxation policies have also been associated with the element of
prospect theory because of the elements of gains and losses that are associated
with the taxes. The choices of the taxes to be enacted in various economies
have the attribute of generation various behavioral changes in the population because
they are the recipient of the population. In this regard, the population will
always tend to adopt the usage of the population that have ideal incentives
about the performance and existence of the economic factors. For a period, this
incentive has continued to impact on the development businesses and other
organizations in the economy. The aspects of taxation policy adoption are based
on the values of perceived earnings and perceived losses. The tendency to avoid
the losses is one of the significant attributes that enhances change in
behavior (Jeffrey John Rachlinski, 2010).
Finally, the underlying aspects and attributes leading tot eh adoption of this
theory is the aspect of human emotions that results from the usage of policies
and commodities. It is evident that the population behavioral changes are
influenced by the perceived benefits from the policies. In reality, the
population will deviate from polices that results in the generation of pain and
loss derived from the losses and on the other hand, the population will adopt
polices leading to gain and joy of the population. The establishment of this
fact is extremely crucial because it helps highlights the factors that enhances
the changes in the behavior of the population. The prospect theory has
relevance in highlighting the illogical behavior of population. One of the
situations is the consideration of the people who do not bank their money to
earn interests or those who refuse to work overtime because of the additional
taxations in both cases, the behaviors are justified because of the
consideration of self interests that every one wishes to satisfy (Hielke Buddelmeyer, 2007). However, in the
long run, the usage of prospect theory in highlighting the contributions of financial
relevance and illogical behaviors is ideal. This representation is critical and
it depicts the consideration of gains and losses perceived from the adopting of
financial practices.
References
Daniel Kahneman, A. T. (2008). Choices, Values, and Frame.
United States: Cambridge University Press.
Farnham, B. (1994). Avoiding Losses, Taking Risks:. Prospect
Theory and International Conflict , 240.
H. Kent Baker, J. R. (2010). Behavioral Finance:
Investors, Corporations, and Markets. Australia: John Wiley & Sons.
Hielke Buddelmeyer, J. C. (2007). Tax Policy Design and
Behavioural Microsimulation Modelling. UK: Edward Elgar Publishing.
Jeffrey John Rachlinski, S. C. (2010). Prospect theory and
civil negotiation. United States: Snippet.
Jorgenson, D. W. (1996). Investment: . Tax Policy and the
Cost of Capital , 180.
Kaa, E. J. (2008). Extended prospect theory:. findings on
choice behaviour from Economics and Behaviorial Sciences , 200.
Kirchler, E. (2007). The Economic Psychology of Tax
Behaviour. New York: Cambridge University Press.
Wakker. (2011). Prospect Theory. New York: Cambridge
University Press.
