Behavioral Economics

On Classical Economists, Matt Dobbins explains, “They would have said, we try to make the right decisions that are going to benefit us, in a world of perfect information.  Well of course that’s not what happens, and behavioral economics once and for all proves that.”

“The Concious rational brain isn’t the oval office, making executive decisions, it’s more like the press office, issuing reasons for those decisions.” -Rory Sutherland

What is Behavioral Economics?

From A talk given by Matt Dobin

Behavioural Economics is the synthesis of cognitive theory and psychology with economics. It focuses in the following areas…

  1. Why do we make different decisions? Especially irrational decisions… How does our brain hard wiring influence this?

Here are behaviours that he pointed out:

Anchoring: The brain uses an initial understanding as an anchor.  For a price this would mean that hearing a high price first, will make a lower price seem great!  In fact, even hearing a high number first, a number totally unrelated to the price of an object, increases expected price.

Herding Instinct, Social norms:  We don’t want to be left out. We want to fit in.

Choice Architecture:  We are very affected by the way choices are presented to us, in context, in various orders, depending on the layout/ display.

We use relativity and comparison to make decisions.

Heurestics, short cuts:

Cognitive biases:  The inherent thinking errors that we make in processing information.

  1. such as loss aversion, status quo bias.
  2. We are risk averse
  3. overly attracted to short term award

We can use this information to market, to design policies, and to design an economy which works with our human behavior instead of against it.

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