By Arjun Chandrasekar.
Brief History
Richard Thaler is known as the founding father of behavioral economics. He is the 2017 recipient of the Nobel Memorial Prize in Economic Sciences for his exceptional work and contributions to studying behavioral economics. He is also well known for his best-selling book, Nudge. I encourage everyone reading this to go and read this book as it gives important insight into the world of economics and psychological decision making. “Nudge shows you how you can unconsciously make better decisions by designing your environment so it nudges you in the right direction every time temptation becomes greatest and thus builds your own choice architecture in advance.”(fourminutebooks.com). He’s gone on to publish many other books including “Misbehaving: The Making of Behavioral Economics”, “Quasi-Rational Economics”, “The Winner’s Curse: Paradoxes and Anomalies of Economic Life”, and “Advances in Behavioral Finance.” The theory or theories of behavioral economics began to form when modern-day economists found oddities in their models of consumer behavior and thinking. They consulted with psychologists to figure out these problems mainly because psychologists were the professionals at behavioral analysis. Economists and psychologists combined forces to form behavioral economics.
General Overview
Economists always created their assumptions off of perfect rationality, meaning that people do what’s best for themselves first. Yet, psychologists came into the mix and disproved this ration, stating that it’s not always like this 100% of the time because there’s no fully accurate way to predict future decision making. Behavioral economics is a booming sector in today’s economics, focusing one the psychological aspect of human decision making regarding finances. You can see theories of behavioral economics being applied anywhere from marketing companies to restaurants. But why is it such an important factor in our world and what exactly is it? That’s what we’ll be covering today.
Examples
We all know that humans put themselves first, and they make decisions based on their wants, needs, and subconscious desires. Let’s check out some instances of this.
- If a person had to choose between buying themself some ice cream or buying someone else some ice cream, chances are they would buy for themselves first. This all plays a role in maximizing self-satisfaction, which is taking care of your personal needs as a priority. The “best” thing to do in this case is to put others before yourself, and buy the other person ice cream first, but we as evolved humans tend to make “irrational” or “greedy” decisions which benefit us.
- Another different sort of example is for instance, when a basketball player scores his record of 40 points in a single game and afterwards thinks he’s the best player on the roster. But what he didn’t take into account was his previous 20 games where he only scored an average of 3 points. This recent game was a mere outlier and caused him to have a different perception on his true abilities.
Conclusion
Overall, behavioral economics is a huge part of our everyday lives, ranging from the different examples above to others such as playing chess, dating, or even taking tests. This article is simply a 101, or an introduction, to the world of behavioral economics, covering the history, the founding father, a definition, and some examples. There are many other ways to learn more about behavioral economics and gain an intrinsic understanding of the psychological aspect of human decision-making in economics, and we advise you to research more after this read! We hope this article helped in any way and if you’d like to learn more about stocks and personal finance, be sure to check out the other article!
