Behavioral economics, based on the principles and rules of psychology, explains why people deviate from taking logical and correct actions when making decisions. But traditional economics believes that because people have limited resources and time, they always make the ultimate rational choice.
Herbert A. Simon, an American economist and psychologist, developed the theory of finite rationality, which explains how individuals' rationality is limited by the time frame, cognitive resources, and difficulty of each decision. Simon also said that decision-makers often look for solutions that are satisfactory at the moment and therefore often ignore the desired solution. . Richard Thaler, the founder of this field of study, considers "mental accounting" to be the process by which people codify, classify, and evaluate economic achievements.
Thaler also has another theory called "impulse" that explains how Individual decisions can be influenced and changed by the use of certain individuals or organizations that use certain influencing techniques.
We look at the analysis of human behavior and economic interactions. We then examine the application of these theoretical foundations to improve the decision-making process and reduce the number of errors in this area. Be with us.
What is Behavioral Economics?
Behavioral Economics Based on empirical observations of human behavior, it shows us that people do not always do what neoclassical economists call "reasonable" or "desirable," even if they have the information and tools to do so.
For example, why do people often avoid doing exercise even though they know it is good for their health? Or, for example, why do gamblers often bet more on the game after winning or losing, even though their odds are the same anyway?
By asking such questions and discovering the answers through experimentation, The field of behavioral economics concludes that humans are beings who, in addition to logic, are also exposed to emotions and impulsivity and are influenced by their environment and circumstances.
It was perfectly reasonable to consider actors who have complete self-control and never give up their long-term goals.
- The law of unintended consequences; Useful actions that have devastating consequences
Behavioral economics experience in action
Think about the last time you bought a custom product. Maybe it was a computer or a laptop. Like many people, you have probably tried to simplify your decision-making process by choosing your favorite brand or the brand you have used before. Then you may have to go to the laptop manufacturer's or retailer's website to place an order. Screen, etc., but you are still not sure what specific hardware features you really need. Upgrade and change as needed by the buyer. How different types of this product are offered to buyers, naturally affects the final purchase of the customer. In fact, the same process we reviewed explains some of the most basic concepts of behavioral economics theory.
The basic model presented in the product customization section first shows the buyer a default choice. The less confident customers are about their decision, the more likely they are to choose the default model, especially if the product is offered by the vendor as a standard, recommended configuration.
In addition, the manufacturer It can add or remove different options to the base product using product customization mode. Finally, the strategy of proposing the base product type and pricing it before the customer customizes the product has the greatest impact on shaping the customer mindset and guiding the purchasing process.
For example, if the final product configured by the customer costs 00 1,500. And the cost of a basic product configuration that was initially suggested was 00 2,000 (with all the extra equipment that is sometimes not needed), the customer will feel much more satisfied with the purchase than the base product 1,000 and the customer's configuration 1 1,500.
Sales professionals do a lot of testing and brainstorming projects to find the optimal pricing point for their base products. In fact, they are looking for a pricing framework for their products that maximizes sales, but at the same time discourages the least possible number of potential buyers from buying because the product is expensive.
- Sturgeon Law; 90% of everything is disposable
Application of Behavioral Economics
Research in the field of behavioral economics has produced several laws that have helped economists better understand human economic behavior. Based on these principles, governments and businesses create codified policy frameworks to lead people to certain choices. Provide a value for why people do not act in their own interests.
Behavioral economics provides a framework for understanding why people make mistakes over time. Systematic errors or biases are repeated in a predictable manner under certain conditions. Behavioral economics concepts can be used to create environments that lead people to wise decisions and healthy living.
Behavioral economics emerged in the background of the traditional economic approach known as the rational choice model./p>
It is assumed that a rational person weighs the costs and benefits of each decision correctly and discovers the best choices available to him or her. This person is expected to know his rational desires (present and future) and never to be caught between two conflicting desires. He has complete control over himself and can control the motivations that may prevent him from achieving long-term goals.
Traditional economics uses these assumptions to predict the actual behavior of human beings. The standard political approach that emerges from this mindset is that, as far as possible, people should be given the right to choose and be allowed to choose what they are most inclined to do (with minimal government intervention). . Because they know their demands better than government officials. People themselves are the best people who know what is best for them.
Conversely, behavioral economics shows us that real people do not behave this way. Humans have limited cognitive abilities and many problems in controlling themselves. People often make choices that run counter to their true interests and happiness. Their happiness will be impaired in the long run, such as drug use or overeating.
As Daniel Kahneman puts it, "Traditional economics and behavioral economics seem to describe two different biological species." Recent research in the field of behavioral economics shows that humans are extremely incompatible and full of contradictions. For example, we choose a goal and then repeatedly act in the opposite direction because our impulsivity prevents us from achieving our goals.
Behavioral economics links the cause of these common decision-making errors to the design of the human mind. Neuroscientists believe that the human mind is made up of different parts (mental processes), each of which operates on its own logic.
In fact, a key view is that the brain has a democratic structure. That is, there is no dominant decision maker. Although the goal of human behavior can be described as maximizing happiness, achieving this goal requires the involvement of several different areas of the brain.
- Parkinson's Law; The secret to doing the most work in the shortest time possible
Behavioral economics seeks to integrate psychologists' understanding of human behavior with economic analysis. In this sense, behavioral economics is parallel to cognitive psychology and tries to lead a person to healthier behaviors by removing cognitive and emotional barriers to achieving personal interests.
Behavioral economics is also a method. Suggests to policymakers how they can change the environment to facilitate better choice for individuals. By analyzing the cause of errors, behavioral economics can suggest policies to policymakers that can change the environment to facilitate better choices. True, it encourages children to buy more nutritious items (for example, placing fruit in front of students, or moving a vending machine to a more remote location).
Overall, the basic message of behavioral economics is that humans Because of their brain structure, they are always prone to making mistakes in their decisions and need an external stimulus to make the right decisions that benefit them. Understanding what people are doing wrong can help them overcome obstacles and problems. This approach actually completes and strengthens the rational choice model (neoclassical economics).