A friend recently commented on how everyone seems to focus on finding out reasons as to why we do things. When, in response, I mentioned ‘Behavioural Economics’ his eyes started to glaze over; rising towards the ceiling. “Not another trend?” he asked. So tried to explain why I felt that this particular approach deserved fuller consideration.
A six year old school girl invited her class mate round to her home. Showing her round the other six year old asked, “Where is the rest of the house?” Now some might be offended with such a comment but remember it is said that ‘out of the mouths of babes’. It just so happened that one of the girls lived in an ordinary suburban two bed-room home whereas the other was the daughter of a film star and she had only ever lived in an eight bed-room mansion estate. She had never known any other home so naturally and curiously she wondered why her school friend lived in such a small home – hence, “Where is the rest of your house?” Now, of course, as the little girl becomes older she will start to appreciate more the differences between all of us. She did not realise that, if she had been older, many would have been offended by her question.
This simple example basically illustrates what ‘Behavioural Economics’ is all about. It’s a method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making. Subconsciously we are all influenced by our background and upbringing both socially, culturally and economically. Some of our experiences we remember and others are somewhere deep within our subconscious. However when it comes to making decisions behavioural economics explains why often they are not totally rational. Behavioural economics explores why people sometimes make irrational decisions, and why and how their behaviour does not follow the predictions of economic models.
If you think about it you may come to the conclusion that the world in which we live is a communal institutional response to our own biology. We are collectively the creators and motivators of our own interactive future both consciously and unconsciously and it is the unconscious element that gives rise to unpredictable outcomes.
Additionally our nature means that we all are motivated by various degrees, depending on our upbringing, to focus on the ‘now moment’. Given a choice which would you go for – $100 cash in your hand now or $110 cash in seven days’ time? You are the exception if you choose the future amount of $110! Accordingly when it comes to making decisions we have to remember that, to ensure that we are fully aware of our future plans and aims, we have to deliberately make our long-term goals a focused consideration. Otherwise the ‘now moment’ will prevail and obscure our forward-looking objectives.
As with the six year old school girls, as we grow older, we forget many influences which have become part of our make-up and consequently impact on us when we make decisions. A well-known saying is; – ‘If you want to become a millionaire first start mixing and socialising with millionaires’. The simplicity of this statement, in terms of behavioural economics, should be obvious. Those without money are clearly not able to think and act as those with money. If you mix with millionaires then ones thinking is bound to change and will influence the way you act and take decisions.
The boss of a United Kingdom holiday tour company recalled one of their mistakes, a lesson to be learnt, on the way to becoming a millionaire. Initially, starting the company from a small back-street office, they had always wanted a car with their own personal number plate. Eventually the day came and an article, in the national press, was published showing their picture in front of his car. It stated how he had paid $20, 00 for the one off number plate. He was happy but it turned out his customers were not as sales started to fall away. He had failed to appreciate that they might consider he was boasting about his success. Spending $20,000 on an apparent frivolous item, when clients had to save in order to pay for their annual holiday, created a negative two-way behavioural economics response, not least because established millionaires instinctively known the dangers inherent in flaunting ones wealth.
Behavioural economists also look at the roles of habit and trust in consumer choice. Proponents of behavioural economics realise that they do not have much to tell psychologists about how individuals makes decisions but rather they have a lot to learn from psychologists. The coming together of individuals from diverse backgrounds, is however, what behavioural economics is about. It endeavours to explain why we sometimes make irrational decisions, and why and how our behaviour does not follow the predictions of economic models.
So the next time you are at the supermarket check-out ask yourself, ‘Do I really want to buy that bar of chocolate or should I get an apple instead?” Train yourself to knowingly make a decision based on going along with the majority’s instinctive choice or planning for your own future with a healthy lifestyle because this will knowingly be behavioural economics – in action!