Behavioural economics is a field of study that combines psychology and economics to better understand
how people make decisions. Unlike traditional economics, which assumes that people are rational and make decisions based on their own self-interest, behavioural economics recognises that people are often irrational and make decisions based on a variety of factors, including emotions, social norms, and cognitive biases.
One of the key insights of behavioural economics is that people often make decisions that are not in their own best interest. For example, people may procrastinate on important tasks, fall prey to scams, or make impulsive purchases that they later regret. These decision-making errors can be costly, both for individuals and for society as a whole.
Behavioural economists study these decision-making errors and try to understand the underlying psychological and social factors that contribute to them. By doing so, they hope to develop policies and interventions that can help people make better decisions and improve their well-being.
One of the tools used by behavioural economists is experimental economics, where researchers create controlled laboratory environments to study people's decision-making behaviours. Through these experiments, behavioural economists have identified a number of cognitive biases that can lead people to make poor decisions.
For example, the availability heuristic is the tendency for people to overestimate the probability of events that are easy to imagine or recall. The framing effect is the tendency for people to make different decisions depending on how the same problem is presented to them.
Behavioural economics also recognises that people are influenced by social norms and expectations. For example, people may be more likely to behave honestly if they believe that honesty is the norm in their community. They may also be more likely to engage in pro-social behaviours, such as donating to charity, if they see others doing the same.
Overall, behavioural economics is a fascinating and important field of study that helps us better understand how people make decisions. By recognising the psychological and social factors that influence decision-making, behavioural economics can help us develop policies and interventions that can improve people's well-being and help them make better decisions.
This can be applied to business and should be. It is often overlooked as we think that people are rational and will often build products and services with this hypothesis. If we were to take a bit of time to appreciate the differences of peoples decision making, we could build better products, better services and better businesses.
What are your thoughts on Behavioural economics?
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