Like every other social science subject, economics also aims toward the world we live in. There is a relationship between human behaviour and economics. The phenomena of economics related to human behaviour including optimal utilization of resources are called behavioural economics.
Behavioural economics focuses on people’s economic decision-making and its consequences on different aspects of the economy. like returns, resource allocation, market prices, and market forces. It combines and relates the elements of economics and human psychology to understand human behaviour. There are basic assumptions that are taken into consideration in it. One, people have neither efficient utility maximisation nor it is their goal. Second, people are capable of making rational decisions from the options available to them. It mainly focuses on activities and decisions regarding the daily course of consumption and other activities in their lives.
Behavioural economics was introduced in the 20th century with aspects of neuroscience and psychology. Economist Gary S. Becker introduced this in his book Economic approach to human behaviour’ in 1976 which has the theory of rational choice. Behavioural economics is considered to be a modern theory that is totally different from the traditional theory of decision-making. It states that most people make irrational decisions because they are emotional and do not have self-control or limited self-control. It also considers other factors like biases, loss aversion, bounded rationality and situational framing, etc. All the factors of the human-like special, emotional, etc. are studied in this branch of economics.
Need for behavioural economics
We need behavioural economics to understand the daily life decisions of customers and anyone else. It is used in the health sector, insurance sector, corporates, multi-national companies etc. In all sectors, it has a significant role to play. Companies are inhabiting behavioural economics to rising their sales. Companies study their customers and make decisions about their business accordingly. Especially, marketing personnel use behavioural economics to conduct competitive market research and marketing strategy. It also helps to understand the customers of competitors which helps any corporate to sustain itself for a longer time. Because of behavioural economics companies tends to understand today that consumer is not rational. Businesses make decision-making policies are now incorporated with the elements and theories of behavioural economics.
Relevance of behavioural economics
Behavioural economics has gained importance in almost all sectors of the economy. It gives initiative for innovation as behavioural game theory helps to run experiments on the irrational decision-making of people. As it is noted earlier, people make rash decisions which also applies to the field of capital markets trading. To analyse, behavioural economics is used and proved to be useful. Using behavioural economics different trading courses are launched in the markets according to the need of various kinds of traders. Not only the corporates, but the government also uses behavioural economics theories and models to formulate various policies in a more effective way and this also helps them to understand the cause of specific actions taken by the economic agents for a specific decision or policy of the government. Behavioural economics raises the explanatory power of economics by providing a more realistic psychological formulation.
Models of behavioural economics represent better modification refining of the standard model into explanatory and predictor using empirical implications derived from observed and experimented studies. It also merits future research and challenges. The approach of behavioural economics toward rational choice and equilibrium models only adds to the framework of analysis rather than replacing or abandoning them.
Today, in this fast-paced world, behavioural economics becomes essential in every sector of all the economies around the globe to perform and analyze decisions making of business and human lives. Behavioural economics has importance when any theory proved inaccurate with its empirical implication indicating that we should question those implicit assumptions that were assumed in the theory given.
FAQs
Relevance of behavioural economics
It gives initiative for innovation as behavioural game theory helps to run experiments on the irrational decision-making of people. As it is noted earlier, people make rash decisions which also applies to the field of capital markets trading.
Why do we need to study economic behavior? ›
Behavioral economists work to understand what consumers do and why they make the choices they make. Such economists also assist markets in helping consumers make those decisions. Behavioral economists may work for the government to shape public policy to protect consumers.
What is the purpose of behavioral economics? ›
Behavioral economics combines elements of economics and psychology to understand how and why people behave the way they do in the real world. It differs from neoclassical economics, which assumes that most people have well-defined preferences and make well-informed, self-interested decisions based on those preferences.
What are the three key insights of behavioral economics? ›
Although this field of research is extremely extensive, we can summarize three key insights from behavioral economics that apply to most economic models: (1) People aren't always rational, (2) People care about fairness, and (3) People are inconsistent over time.
How is behavioral economics used in everyday life? ›
Behavioral economics sheds light on most every day activities and why we consume goods and services the way we do, why we make certain choices about ourselves or others, and how we decide courses of action.
What is the key contribution to behavioral economics? ›
The main contribution from behavior analysis is the individual and circ*mstance-specific research methods and the ability to extend this research into large-scale analysis and applied research, describing economic lawfulness based on individual behavior.
What is the main aim of economic behavior? ›
The aim of behavioural economic research is to gain more knowledge about human decision making behaviour and also to better inform and politically shape social phenomena (such as investment in private pensions, health care, decisions on finance and education), mostly in accordance with the normative ideal of rational ...
What is the relevance of economics? ›
The simple answer is it affects our everyday lives through important areas such as tax, interest rates, wealth, and inflation. Economists provide the tools by which analysts can study the costs, benefits and effects of government policies in a range of areas that affect society.
Why is studying behavioral economics important in health care? ›
Behavioral economics is a useful tool that can be leveraged to help clinicians make decisions that are in the best interests of their patients. Peer feedback, opt-out messages, and defaults are a few of the ways in which health systems can make the right choice the easy one to make for clinicians.
What is the advantage of behavioural economics? ›
Behavioural economics can be a powerful tool in achieving consumer policy goals, by nudging people to make healthy, sustainable and cost-conscious choices. It can also, however, be used against consumers' interests by misleading and deceiving them by exploiting their biases.
Behavioral economics also has implications in the public policy space. By understanding how people make decisions, and how their choices are influenced by factors like emotions and biases, government agencies can develop policies that are more likely to be effective in achieving their intended goals.
What is the major of behavioural economics? ›
Overview. Behavioural economics is the subfield of economics that applies insights about human decision-making as it departs from classical economic models to individual choices and business and policy scenarios.
What is behavioral economics in simple words? ›
Behavioral economics (BE) uses psychological experimentation to develop theories about human decision making and has identified a range of biases as a result of the way people think and feel. BE is trying to change the way economists think about people's perceptions of value and expressed preferences.
What methods are used in behavioral economics? ›
Behavioral economics combines traditional research of economics by referring to and introducing research methods of psychology and sociology. Mainly uses observation, investigation and experiment to study human economic behavior. The use of these methods makes behavioral economic theory more objective and effective.
What are cognitive biases in behavioral economics? ›
Definition of a cognitive bias
Cognitive biases influence the way we perceive and interpret information. They can cause us to make decisions that aren't based on facts and behave in ways that don't follow logic. Cognitive biases are a fundamental concept in behavioral economics.
What is the relevance of the behavioral approach? ›
The central purpose of the behavioral approach is to explain how leaders combine these two kinds of behaviors to influence followers in their efforts to reach a goal. Many studies have been conducted to investigate the behavioral approach.
What is the relevance of behavioral theory to management? ›
Behavioral management theory relies on the notion that managers will better understand the human aspect to workers and treat employees as important assets to achieve goals. Management taking a special interest in workers makes them feel like part of a special group.
What is the relevance of Behaviourist? ›
Behaviorist techniques have long been employed in education to promote behavior that is desirable and discourage that which is not. Among the methods derived from behaviorist theory for practical classroom application are contracts, consequences, reinforcement, extinction, and behavior modification.
