“Behavioural experiments show that we are disproportionately impatient in the short term relatively to the longer term: we prefer to spend today over tomorrow, but when planning for the future we prefer to spend in a year and a day than in a year.” – Michelle Baddeley
Our economy is driven by business – and business is impacted by people. Meanwhile, people are tied to emotions and psychology. To put it simpler, our economy is related to how individuals’ emotions and psychology react to market and products, or as we know it today as behavioural economics.
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In a glance, behavioural economics is about how psychology affects economic decision-making. It relates to how our thoughts and emotions affect how we make decisions about our everyday life choices, including shopping, recruiting, working, etc. Behavioural economics also explores why there are times we end up making irrational decisions. On the one hand, behavioural economists are studying how humans make decisions. They look at given problems and limitation that results in individuals faced with decisions.
Behavioural economics tells much about our awareness that influences our decision. It is applicable because it explains some of our behaviour that we don’t even think twice about. For example, Alex buys a coffee which is more expensive in café A, rather than café B although the coffee tastes the same. Why? Because Alex has wired with some information that café A tastes better than B. So, he continuously becomes a consumer of café A.
Alain Samson, in this regard, explained further that behavioural choices do not depend on price or frame. Rather, it depends on our decision of a careful weighing of costs, preference, and information by existing preference. In Alex’s case, he has tasted the coffee at the café B. However, with the influence of existing opinion by others and his own preferences, he chooses to buy in café A despite more costly.
Furthermore, Samson in his study showed that human decisions are strongly influenced by context, including the way in which choices are presented to us. This behaviour varies across time and space that is also subject to cognitive biases, emotions, and social influences. Decisions are the results of less deliberative, linear, and controlled processes, Samson wrote, than we would like to believe.
“Social influence can be divided into informational and normative influences. The former is about how we learn from others, while the latter is about how we respond to pressures from groups around us.” – Michele Baddeley
Michele Baddeley in her study on behavioural economics also added that in the past, economists researched about how incentives and motivations are affected by psychological influences. In the present times, behavioural economists focus more on the same topics and other topics such as social influences of our decision and impacts of personality and emotions on decision-making. And in the future time, behavioural economics will go beyond studying an individual. Economists are interested in revealing how behavioural economics impact policy-making and beyond.
Read also: How to Train Your Brain to Make Better Decisions