Behavioural Economics

Understanding Behavioural Economics

Behavioural Economics refers to the study of the human mind in their decision-making process and economic life. Often, our decisions are informed by what we have seen or heard through the experience of others. The theory that explains behavioural economics is the rational choice theory. The theory states that man tends to make economic decisions to derive maximum satisfaction since resources to satisfy his wants are relatively scarce.

Our preferences can illustrate an example of behavioural economics for certain brands over others. The mind is psychologically made to believe you derive more satisfaction from a brand than the other, either through the reviews given by others or through the brand’s advertisement or packaging.

The decision-making process of man is influenced by factors such as emotions and, most times, leads man to make irrational decisions. Behavioural Economics, therefore, study why a person forgoes an option in place of another.

Ideally, a man should control his insatiable desires and choose wisely on a cost and benefit analysis scale. Most times, the usual decision-maker is the scale of preference table.

Many people wonder why we bother to study our pattern of decision-making. We seek to improve our daily lifestyle by reviewing our past decisions, and the study also helps us apply self-control to avoid deviation from rational behaviour.  Also, it is of immeasurable significance to marketers as it enables them to study the human mind and use its functionality to satisfy wants through products.

Instances that can be related to Behavioural Economics are;

Preparing excuse as an explanation for success or failure, e.g., saying one fails because of inadequate time to read or answer questions even when they are not valid or buying a particular brand of a product although costlier because of perceived quality. Without any constraints, anyone would prefer an H.P. laptop over any other brand. Likewise, Starbucks over any other coffee brand.

One particular use of Behavioural Economics is its application to Heuristics, which results in irrational decisions. Heuristics refer to a short-cut method of making decisions and includes rules of thumb such as trial and error, guesswork, elimination method and empirical data collection. While they are known to make very timely decisions, they are not always the most rational to choose.

Behavioural Economics is also useful for testing the application of game theory. The game theory is a framework of study that creates social situations among rivalling players and informs the best decision making. In this theory, decisions are influenced by another’s choice, and the outcome is derived from there.

Another field of study in which behavioural economics is applied is Finance. Behavioural economics studies why finance players make irrational decisions.

Furthermore, behavioural economics has been applied in the area of sales marketing. A significant example is two products marketed in two different packaging styles, with one of them containing an in-depth description of usage guidelines.

Usually, people would demand more for the latter with an explanation. Likewise, when products are placed at a higher price from their introduction to the market, the price is subsequently reduced. People would order because they think they are being offered the value for the initial cost, although this may not be true.