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Economic Sciences
What Is Behavioral Economics?
Behavioral economics, by merging psychology and economics, shows that people, contrary to the rational choice model, do not act in their own best interest and fall into systematic errors. This approach finds ways to nudge toward wiser decisions.
The field of behavioral economics blends insights from psychology with economics and offers valuable perspectives on how people’s behavior does not align with their best interests. Behavioral economics provides a framework for understanding when and where human beings make mistakes. Systematic errors or mistakes occur predictably in specific situations. The lessons of behavioral economics can be used to create environments that nudge people toward making wiser decisions and living healthier lives.
Behavioral economics emerged in opposition to the standard economic view known as the rational choice model. It is assumed that the rational person correctly weighs costs and benefits and makes the best choices for themselves. This rational person is expected to recognize their preferences (both present and future) and never oscillate between two conflicting desires. They are supremely capable of self-control and can restrain momentary impulses that might prevent them from achieving their long-term goals. Conventional economics uses these assumptions to inform actual human behavior. The standard policy prescription that stems from this view is to offer people the greatest possible number of choices and leave them (with minimal government action) to select what they most prefer, because they know their own welfare far better than government officials do. Individuals know best what is best for them.
In contrast, behavioral economics shows that real human beings do not act this way. People have limited cognitive abilities and great difficulty with self-control. People often make choices that bear a problematic relationship to their welfare (=happiness). They try to choose the option that yields the quickest result, at the expense of their long-term happiness: such as using drugs and overeating. They are fundamentally overwhelmed by context and often have little idea what they will like next year or even tomorrow. As Daniel Kahneman (2011, p. 5) says, “It is as though conventional economics and behavioral economics are describing two different species.” Behavioral economics shows that we are exceptionally flawed and fallible human beings. We choose a goal and then subsequently act against it because difficulties with self-control cause us to fail in carrying out our aims.
Behavioral economics traces such errors in decision-making to the schema of the human mind. Neuroscientists claim that the mind has different parts (=mental processes), each operating according to its own logic (Kurzban, 2011). Bourcas and Carrillo (2013) note that the brain is truly like an organization of systems that interact with one another. The important point is that the brain is a democracy (Tononi, 2012). This means there is no single dominant decision-making element. Although an individual’s behavioral goal can be expressed as maximizing happiness, achieving this goal requires the cooperation of different regions of the brain.
Behavioral economics seeks to bring together psychologists’ understanding of human behavior with economic analysis. From this perspective, behavioral economics runs parallel to cognitive psychology, which attempts to guide individuals toward healthier behaviors by modifying the cognitive and emotional obstacles they face in the pursuit of their true self-interest (Loewenstein & Haisley, 2008).
Finally, behavioral economics suggests ways that policymakers can restructure environments to facilitate better choices (Sunstein, 2014). The focus on errors [in human behavior] suggests ways that policymakers can prepare the environment for making better decisions. For example, simply rearranging the order of items currently offered in schools encourages children to purchase more nutritious foods (for instance, by placing fruit in plain sight, placing soda vending machines out of reach, or charging students for desserts and soft drinks).
Overall, the central message of behavioral economics is that human beings are exceedingly strange in their judgment of errors and need a nudge to make decisions that are most in their own best interest. Knowing where people go wrong can help them go the right way. This approach complements and enhances the rational choice model.
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The field of behavioral economics blends insights of psychology and economics, and provides some valuable insights that individuals are not behaving in their own best interests. Behavioral economics provides a framework to understand when and how people make errors. Systematic errors or biases recur predictably in particular circumstances. Lessons from behavioral economics can be used to create environments that nudge people toward wiser decisions and healthier lives.
Behavioral economics emerged against the backdrop of the traditional economic approach known as rational choice model. The rational person is assumed to correctly weigh costs and benefits and calculate the best choices for himself. The rational person is expected to know his preferences (both present and future), and never flip-flops between two contradictory desires. He has perfect self-control and can restrain impulses that may prevent him from achieving his long-term goals. Traditional economics use these assumptions to predict real human behavior. The standard policy advice that stems from this way of thinking is to give people as many choices as possible, and let them choose the one they like best (with minimum government action). Because they know their preferences better than government officials do. Individuals are in the best position to know what is best for them.
In contrast, behavioral economics shows that actual human beings do not act that way. People have limited cognitive abilities and a great deal of trouble exercising self-control. People often make choices that bear a mixed relationship to their own preference (happiness). They tend to choose the option that has the greatest immediate appeal at the cost of long-term happiness, such as taking drugs, and overeating. They are profoundly influenced by context, and often have little idea of what they will like next year or even tomorrow. As Daniel Kahneman (2011, p5) put this, “it seems that traditional economics and behavioral economics are describing two different species.” The latter shows that we are exceptionally inconsistent and fallible human being. We choose a goal and then frequently act against it, because self-control problem fails us to implement our goals.
Behavioral economics traces these decision errors to the design of the human mind. Neuroscientists argue that the mind consists of many different parts (mental processes), each operating by its own logic (Kurzban, 2011). Brocas and Carrillo (2013) note that the brain is best represented by an organization of systems that interact with each other. A key insight is that the brain is a democracy (Tononi, 2012). That is, there is no dominant decision maker. Although the behavioral goal of an individual can be stated as maximizing happiness, reaching that goal requires contributions from several brain regions.
Behavioral economics attempts to integrate psychologists’ understanding of human behavior into economic analysis. In this respect, behavioral economics parallels cognitive psychology, which attempts to guide individuals toward more healthy behaviors by correcting cognitive and emotional barriers to the pursuit of genuine self-interest (Lowenstein, and Haisley, 2008).
Finally, behavioral economics suggests ways how policy makers might restructure environments to facilitate better choices (Sunstein, 2014). The focus on errors suggests ways how policy makers might restructure environments to facilitate (nudge) better choices. For example, simply rearranging items that are currently offered within the school encourages children to buy more nutritious items (e.g., placing the fruit at eye level, making choices less convenient by moving soda machine into more distant areas, or requiring student pay cash for desserts and soft drinks).
In sum, the basic message of behavioral economic is that humans are hard wired to make judgment errors and they need a nudge to make decisions that are in their own best interest. The understanding of where people go wrong can help people go right. This approach complements and enhances the rational choice model.
References
Brocas I., Carrillo JD (2013). Dual-process theories of decision-making: A selective survey. Journal of Economic Psychology, http://dx.doi.org/10.1016/j.joep.2013.01.004
Kahneman Daniel (2011) Thinking, Fast and Slow, New York: Farrar, Straus and Giroux
Kurzban Robert (2011). Why Everyone (Else) Is a Hypocrite: Evolution and the Modular Mind. Princeton University Press
Loewenstein, George; Haisley, Emily (2008) “The economist as therapist: The methodological ramifications of “light” paternalism”, in Andrew Caplin And Andrew
Sunstein, CR (2014) Why Nudge? New Haven: Yale University Press.
Tononi, Giulio (2012). Phi: A Voyage from the Brain to the Soul. Pantheon
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References
1_Brocas I., Carrillo JD (2013). Dual-process theories of decision-making: A selective survey. Journal of Economic Psychology, http://dx.doi.org/10.1016/j.joep.2013.01.004
2_Kahneman Daniel (2011) Thinking, Fast and Slow, New York: Farrar, Straus and Giroux
3_Kurzban Robert (2011). Why Everyone (Else) Is a Hypocrite: Evolution and the Modular Mind. Princeton University Press
4_Loewenstein, George; Haisley, Emily (2008) “The economist as therapist: The methodological ramifications of “light” paternalism”, in Andrew Caplin And Andrew
5_Sunstein, CR (2014) Why Nudge? New Haven: Yale University Press.
6_Tononi, Giulio (2012). Phi: A Voyage from the Brain to the Soul. Pantheon
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What Is Behavioral Economics?
Helping people live healthier, happier lives
Author: Shahram Heshmat
Translator: Pejman Ranjbar
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