What is Behavioural Economics?

Behavioural economics is a field of economics that combines psychological insights with economic theory in order to better understand how people make decisions.

The study of behavioural economics recognises that people do not always act in their own best interests or make decisions in a perfectly rational way, and that they are influenced by a variety of cognitive biases and emotional factors.

Bounded rationality

Behavioural economics differs from traditional economics in that it assumes that people are bounded by their cognitive and emotional limitations, rather than being perfectly rational actors. It seeks to understand how these limitations influence economic decision-making and to incorporate this understanding into economic models.

As a result of bounded rationality, people do not always make fully rational decisions, but instead rely on rules of thumb, heuristics, and other mental shortcuts to simplify complex problems.

An example of bounded rationality might be a person who is trying to decide which car to buy. They may consider a variety of factors, such as the price, fuel efficiency, safety ratings, and features of different models. However, they may not have the time or resources to fully research every available option or to consider every possible factor that could influence their decision. Instead, they may rely on mental shortcuts, such as the brand reputation or the recommendations of friends and family, to simplify the decision-making process.

The impact of behavioural economics

Behavioural economics has had a significant impact on a number of areas, including consumer behaviour, behavioural finance, and government policy including the idea that subtle nudges might change the decisions that people and other economic agents make.

Behavioural nudges

Nudges are designed to take advantage of cognitive biases and psychological principles in order to steer people towards making more informed and beneficial decisions.

An example of a behavioural nudge is the use of choice architecture.

Choice architecture refers to the way in which choices are presented or organised, and it can be used as a behavioural nudge to influence people's decision-making.

The idea behind choice architecture is that the way in which options are presented can affect people's choices, even if the options themselves are unchanged.

For example, research has shown that people are more likely to choose healthier meal options if they are presented more prominently or are made more convenient. This could involve placing healthier options at the front of a cafeteria line or making them more easily accessible in a vending machine.

Similarly, people are more likely to choose a default option if it is presented first or is made the default choice in a given situation.

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