5 Principles of Behavioural Economics


Behavioural Economics – All you need to know

Have you ever expected that there exists a discipline that is inspired by both economics and psychology or something that is exactly borne out of them? If you haven’t, then embrace yourself for the truth because there exists one. Behavioural Economics is a peculiar discipline of study that involves a serious interface of psychology and economics. It focuses on identifying and comprehending the economic decision-making processes of individuals and groups. It attempts to theorize as to why people make the decisions they make when it comes to matters of finance, budgets and economics, the decisions no matter being rational or irrational.

Read More: The Psychology Behind Irrational Decisions

In the field of economics, people are considered to make ideal choices that are the most suitable to them. the rational choice theory propagated by the theorists of economics talks about individuals making rational and practical choices even in the face of scarcity of resources that ought to satisfy their needs. The discipline considers humans to be rational beings who are not influenced by any of their emotions and other external stimuli.

Read More: What is Decision Fatigue?

While, on the other hand, behavioural economics considers human beings as those who are influenced by emotions, as capable of taking decisions that will certainly be influenced by their emotional quotient and other external factors. They may fall prey to feelings of loss of self-control, or even bandwagon effect wherein their decisions will be taken aligning to the decisions of the larger social group they are part of. Behavioural economists work under various titles in their workspaces which include:

  • Management Consultant
  • Product Manager
  • User Experience (UX) Designer
  • Market Research Assistant
  • Policy Analyst
  • Research Assistant
  • Human Resources
  • University Professor
  • College Lecturer
  • Postdoctoral Fellow
Principles of Behavioural Economics
  1. Framing: The notion of framing is how something is presented to an individual. This behavioural economics notion illustrates a cognitive bias in that an outcome can be impacted by the structure of how something is presented.
  2. Heuristics: Heuristics is a sophisticated subject, but it essentially states that humans prefer to make decisions using mental shortcuts rather than long, reasonable, ideal reasoning. Most of the time, individuals cling to something that is no longer true. In this case, it is easier for the consumer to continue doing what they have been doing rather than recognise a more advantageous situation exists.
  3. Aversion to Loss: People do not like losses, according to behavioural economics. People are so afraid of loss that an economic consequence of one negative financial value overcomes the emotional toll of the same positive financial value.
  4. Inefficiencies in the market: To put it another way, the market can benefit from behavioural economics. As a result, market inefficiencies are important in behavioural economics. For example, a $20 stock may be trading at $50. If the price falls to $40, investors may see this as a terrific opportunity.
  5. Sunk-cost fallacy: The sunk-cost fallacy refers to an emotional attachment to costs incurred in the past. Consumers and investors have a more difficult time & letting go of the committed capital. Consider a failed stock that was bought at $100 per share and is now worth $15 per share. An investor may not feel forced to buy in at $15 per share if they believe the company is not worth that much. They are, nevertheless, unable to sell their shares purchased at $100 a share due to an emotional commitment to that pledged capital.

Also Read: The Psychology of Consumer Behaviour

How to be a Behavioural Economist?

To pursue a career as a behavioural economist, one ought to follow the first 3 steps given below compulsorily while the rest would aid him or her in gaining advanced skills in the field. Follow these steps to become a behavioural economist:

  1. Educational Foundation: A bachelor’s degree in economics, psychology, or a related discipline is required. One ought to prioritize education that combines economic principles and psychology, as this interdisciplinary knowledge is essential.
  2. Higher Education: Further moving into the field, one must earn a master’s degree or a doctorate in behavioural economics, economics, or a closely related discipline and attempt to step in and conduct research and coursework on behavioural theories and approaches.
  3. Experience with Research: To be an experienced personnel in the field, one must compulsorily gain research experience by participating in internships, assistantships, or entry-level positions. Participation in research on behavioural phenomena and economic decision-making is very desirable.
  4. Networking: Attending conferences, seminars, and workshops to network with behavioural economics professionals and participating in relevant online communities and debates to broaden your network is further desirable as well.
  5. Publications and Presentations: Professionals must attempt to work on and present findings at conferences and publish their research papers in scholarly journals. This will not only help them advance their knowledge base but also develop a robust research portfolio to demonstrate field knowledge.
  6. Remain Informed: Professionals must also ensure that they stay up to date on the latest behavioural economics research and advancements. These updates can be attained by reading and following scholarly papers, books and works of famous behavioural economists.
  7. Academic and Teaching Position: One of the most sought-after professions in the field of behavioural economics along with research works are academic and teaching positions. It provides a fertile platform for seeking individuals to expand their knowledge about the field and aid them to remain constant contributors to the advancements in the discipline.

Behavioural economics, to date, remains a relatively underexplored field under the banner of psychology, however, there exists no doubt in its inevitability and relevance concerning the needs of the globalized modern nations around the world. It offers insights into understanding the decision-making processes of human beings through a psychological lens. The discipline highlights the interaction between cognitive biases and emotions while exhibiting economic behaviour, thus rendering emphasis on its complexity. Ultimately, behavioural economics paves a smooth path to comprehending the concepts of economic behaviour by bridging the gap between conventional economic theories and the psychological dynamics of behaviour.

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