Dejargonised – Behavioural Economics Made Easy

Smoking is injurious to health.

Each one of us is aware of the consequences of smoking. Smoking causes cancer. Smoking may kill you. And the worst of all, smoking may make you the subject of a horrific video that will be shown to the whole nation on big screens.

The government has been increasing taxes on tobacco products to discourage its consumption, yet millions of adults and children continue to consume it.

Why do people still spend money on something that they know is harmful to them?

Why do people indulge in impulsive shopping?

Why do so many people fail to stick to their healthy diet when they go out to a restaurant?

Why are consumers more likely to buy products priced at 99/499/2499 instead of 100/500/2500?

 

Behavioural Economics has tried to answer these questions.

Economists, for decades, have based their theories on the assumption that human beings always make logical and favourable choices. This assumption is not only far from reality, it also ignores the most human aspect of being human – irrationality. Our judgement is clouded by deep rooted biases and prejudices that we may not even be aware of. This gave birth to the field of Behavioural Economics where the principles of psychology and economics come together to explain the choices of human beings.

Behavioural Economics studies the effect of psychological, social, cognitive and emotional factors on the economic decisions of individuals and institutions. For instance, psychologist Sheena Iyenger, conducted an experiment and found that consumers are 10 times more likely to buy jam on display when the number of jams available was reduced from 24 to 6. This is known as the ‘Choice Overload Problem’. Organisations use behavioural economics to understand how their consumers make choices. It is also used by policy makers to draft better policies and ensure effective implementation.

What if I told you that Behavioural Economics can help you lose weight? (Yes, you read that right). Stickk.com, a website created by behaviour economists at Yale University, helps you achieve your goals through commitment contracts. The users choose a time-bound goal, like losing 10 kilos in 100 days, and pledge a sum of money. If they achieve the goal, they get their money back and if they don’t, they lose their money to a friend or a charity. They use the behavioural economics theory of ‘loss aversion’, according to which, most people prefer to avoiding losses to acquiring gains.  It also leverages the power of financial incentives to ensure action.

With individuals leaving digital footprints every second, there’s a tonne of data to which behavioural economics can be applied. Companies can have access to a more accurate insight into the minds of consumers which will help them to design a better product and marketing strategy. Our leaders can use behavioural economics to draft more effective policies and implementation programs #knowyouraudience

Amidst the eternal battle between head and heart, we don’t always end up making rational choices. There are times when we act impulsively and think later. I call it “what was I thinking?” moments. We are being fed terabytes of data and our choices are the products of how our mind processes this data. Although behavioural economics has its limitations and experts have been warning us about the dangers of using this tool unethically, Behavioural Economics is the tool for future.

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