Behavioural Economics - Psychology and Economics

Behavioural Economics is a field which involves the study of Psychology and deals with the economic decision-making processes of an entity, an individual or an institution.

Introduction to Behavioural Economics

What is Behavioural Economics?

Behavioural Economics explains the irrational economic decisions taken by individuals sometimes. It helps understand why a person chooses Choice A instead of Choice B. In the present era, when there is a variety of choices available for people, the Rational Choice theory of economics comes into play. This theory states that when humans have various options under conditions of scarcity, they choose the option which gives them maximum satisfaction. According to the theory, after rationally doing a cost and benefit analysis of every option available to them under the circumstances, choose the best option.

Behavioural Economics

Behavioural Economics also seeks to explain how irrational economic decisions tend to affect an individual. Behavioural Economics explains the reasons behind irrational decisions made by an individual. As humans have emotions, distractions and varying self-control, they sometimes choose an option which is not rational and thus gets affected afterwards.

 Six essential Behavioural Economics principles are:

• The Overconfidence Effect

• Temporal Discounting

• Loss Aversion

• Anchoring and Framing

• Social Norms

• The Peak-End Rule

Behavioural Approach

Behavioural Approach is concerned with the behaviour of human beings rather than the mind. It involves a behavioural decision making process. This approach advocates that human behaviour is a learned aspect; therefore, all behaviours can be unlearned, and new behaviour learned in their place. The Behavioral approach is the most effective way of treating Behavioural Disorders and other Impulse Control disorders. This can also be used to treat anxiety and other mental disorders. BF Skinner is the founder of the Behavioural Approach.

The behavioural approach takes into consideration that human beings are not incapable of making errors and that through rational decision-making and proper behaviour control, errors can be amended.

Behavioural Finance

Behavioural Finance deals with studying the psychology of investors and financial markets. Behavioural Finance explains why investors make decisions that are not in their best interest. It focuses on rational decision-making. 

Behavioural Finance

Summary

Behaviour Economics has its foundation in the Behavioural Approach, which believes that the behaviour of human beings is dynamic and thus can be learned and unlearned. It requires efforts to change behavioural patterns. This behavioural approach is utilised in almost every discipline since it provides a sense of positive affirmation. Some of the behavioural economics examples are very common. In Healthcare, patients tend to believe that they will be cured after treatment. In education, students tend to perform better when provided a small treat. Behavioural Economics, in the same way, focuses on making the best choices and keeping the situations in mind.