I N BRIEF
P.8
An Introduction
into
W
Behavioural Economics
Saaber Fatehi being a realistic representation of
hat is Behavioural Economics?
Behavioural Economics is
the study of why people
sometimes make irrational decisions.
It studies why and how their behaviour
does not follow the predictions of
economic models. Neoclassical
economists, those that believe markets
always tend to equilibrium, assume
that all people make rational decisions.
However, this has been highly criticized
for not
society in which irrational decisions
occur all the time. This is where
Behavioural Economics comes in.
Why do people make irrational
decisions?
These can occur due to three main
reasons: heuristics judgments, the
framing of situations and market
inefficiencies. Heuristics judgments are
when people make decisions not based
on strict logic, but on a ‘rule of thumb’
basis. An example of this could
be when someone attempts a
problem by trial and error or
by process of elimination.
On the other hand,
framing is not the
way we perceive a
problem that is
given to us, but
how we respond
differently
to situations
when they are
presented in
a various
ways. A
Behavioural
Economist
can ‘frame’
a situation
because
of the fact
that our
response
depends
on how
the
situation is
presented
to us. Finally,
market
inefficiency
is when people
make non-rational
decisions due to a
lack of information.
Economists believe that
if people have complete
information, then all their
decisions will be more rational.
How can this research by used in the
real world?
Some examples of this research in the
real world are:
1.To increase organ donation in society
A common behavioural economics tool
is to set a ‘default’ option in a decision.
When a default option is present, most
people do not change from this. If the
default option for donating organs
were that people are automatically
opted-into donating their organs, then
there would be a huge increase in
organ donations.
2.Getting people to eat more healthily
People can be influenced into the
choices they make in a lunch hall
depending on the positioning of the
food. If healthy food is positioned close
and unhealthy food positioned further
down, research shows people are much
less likely to choose an unhealthy
option.
3.Use by capitalist firms
Firms exploit the use of this research
by using it to get people to buy their
products. A common technique is to
place some goods right at the front
of a shop, making it the first thing you
see as you walk in. This increases the
likelihood of you ‘impulse’ purchasing
the good when you had no interest in
buying it before you walked into the
shop.
Interested and want to read more?
Some great Behavioural Economics
books are:
• Nudge: Improving Decisions About
Health, Wealth and Happiness – Richard
Thaler and Cass Sunstein
• Predictably Irrational: The Hidden
Forces that Shape Our Decisions – Dan
Ariely
• Thinking, Fast and Slow - Daniel
Kahneman