Behavioural economics: understanding the psychology of decision-making
Posted on Aug 08, 2023 at 08:08 PM
The concept of behavioural economics after the 1970s; is an important concept that helps governments, institutions, and various companies to understand the psychology of people's decision-making on procurement and how to predict and influence it in a fast-paced world.
From this, the following guide provides essential details about this science and its applications and highlights the concepts and principles underlying these economies; follow with us.
What does behavioural economics mean?
Behavioural economics is a modern and essential psychological and economic science, and many scientists and theorists have provided definitions of this term. Still, the broader and better explanation is that it is a behavioural theory that interests in analysing and studying the overlap of people's behaviour when making irrational behavioural choices and decisions.
Behavioural economists care about studying the concepts of behavioural economics and understanding how human society behaves with public policies and attitudes. Behavioural economics combines various psychological, economic, and financial factors to analyse the inconsistencies between how society should behave and how behaviours take place or the natural world while analysing the impact of such behaviours.
People make decisions about many things, for example, how much to save and how much to pay for modern products, and whether to follow a healthy life system.
Behavioural economics focuses on studying the reasons for a person's preference for one choice from another. Behavioural economists assume that people are emotional and anything can influence their decision and distract them, as they are so vulnerable to making choices that are not always in their interest.
While traditional or classical economics assumes that individuals are rational in their decisions because it depends on their interests or the information available to them, behavioural economics is the exact opposite; it examines the hidden reasons behind irrational decisions of individuals that are often incompatible with the expected economic model.
What factors influence people's decisions?
Factors in irrational decision-making are diverse, such as emotional, social, psychological, cultural, cognitive, and other factors, but according to the behavioural economy considering decisions with the following elements:
-
Limited or restricted rationality:
Most people make their decisions based on their knowledge and limited thinking, believing that their thoughts and experience in life are enough to make a decision instead of using others to make the best possible decision.
-
Choose Architecture:
The method of placing and displaying goods and products or deals has a very influential role in directing insights to them and thus influencing people's decisions; for example, ink and pen supplementary goods, when displayed together, the sale of ink can be better than if offered alone.
-
Cognitive bias:
Beliefs, values, and the way to analyse involve the things creating an economic decision; for example, if someone likes a colour or cartoon personality, then the chances of buying or using models and products that carry the colour they want or their preferred character will likely increase.
-
Discrimination:
People reject many options for hating something about it versus preferring other options for averting the alternative option.
-
Herd mentality:
Of course, human beings love belonging, consumers' decisions are affected by what others do to achieve that affiliation, and leadership through change is based on this principle, so they may spend a lot of money on a product or commodity to feel like a class, team, or community to recognise.
What are the essential principles of behavioural economics?
The economy as a whole is a vast subject; although behavioural economics is only one of the branches of the economy, it has visions and guidelines for the issues:
Framing:
This principle describes how to present or explain something to a person in all respects, where expecting or determining the results can be, for example, providing information that can be positive or negative.
Inference:
A complicated field, expressing that most people make their own vital decision to use mental abbreviations rather than long-term reasoning; for example, an individual may cling to a product throughout his life rather than thinking about trying other products that might be more useful; we tell you to enrol in short leadership online courses that explain how to get out of the cochlear and discuss how to think more.
Loss aversion:
The idea of fear of loss is so rooted in behavioural economics humans hate loss that studies have shown that negative feelings when losing something far outweigh positive feelings when achieving something, even if its economic value is much higher.
Inefficiency:
An inefficient market has a prominent role in behavioural economics. For example, high-priced stocks no longer tempt today's investors because of a low price-yield ratio. Do accounting skills qualify you for financial management work? See the link and check your work abilities.
Mental accounting:
Investors and consumers influence market trends and can change them according to their circumstances; although it is fair, it may be illogical, for example when investors receive their annual bonuses, some of them may invest in high-risk stocks; that process is a phased decision based on circumstances rather than a long-term strategy.
Sunken Cost Fallacy:
This fallacy places an emotional cling to the costs paid in the past as both consumers and investors have difficulty abandoning their old investments despite their failure; for example, when the stock price falls from $100 per share to $15 per share, No one will invest in that stock anymore, but they are also unwilling to sell the old shares they bought at $100 per share because of an emotional link to committed capital.
To Conclude,
Behavioural economics combines past traditional economic theories and psychology aimed at understanding people's financial decisions, how and why they arrived at them, and what differs from rational choices and seeking to guide behaviours to serve companies and make profits.
