“Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?”- Dan Ariely
We experience examples of behavioral economics that are seen in our daily lives more than we can imagine. In which ways do these principles affect us?
The frenetic pace of our life is exhausting—juggling from work, to the gym, to the supermarket, and running our errands, making time for meals, and everything else we need to get done before we start the next day afresh. We get so engrossed in our daily routines that it’s nearly impossible to become aware of the various factors that influence our behavior. Behavioral economics is as relevant as it sheds light on everyday activities and our behavior that we usually ignore.
In this post, we shall try to find answers to these questions:
What Is Behavioral Economics?
Behavioral economics integration that studies the teachings of psychology and economics. Moreover, behavioral economics forms an incredible lens that exposes inner biases and approaches to decision-making of individuals and institutions.”
Behavioral economics principles play a vital role in shaping how we live our lives. By understanding the effect they have on our behavior, we can actively work to mold our truth.
Examples of Behavioral Economics
1st Example: Playing sports
Principle: Hot-hand fallacy—the false belief that a person who succeeds with a random event has a higher probability of future success in the next additional attempts.
Example: If you see a basketball player, who is making multiple shots consecutively with a feeling like they have a “hot hand” and they are likely to hit the next one.
Relation to BE: Human perception and tendency can be impaired by false signals. There is no “hot hand” it’s just randomness and luck, they’re predictions are based on recent events, and not the underlying probabilities leading to believe in an illusory hot hand.
2nd Example: Taking an exam
Principle: Self-handicapping—a rational strategy where people dodge effort to protect their self-esteem.
Example: In case a student performs poorly, she tells her friends that she barely studied for a college test, even though she prepared thoroughly.
Relation to BE: People create obstacles in their own paths (and make it difficult for their ownselves) so as to manage future explanations to reason out their success or failure.
3rd Example: Grabbing coffee
Principle: Anchoring—the process wherein you plant a thought or idea in a person’s mind that shall influence this person’s actions later.
Example: Starbucks differentiated itself from Dunking’ donuts by creating distinctive ambiance of their store and product names. This helped the company to break the anchor of Dunkin’ prices and charge high.
Relation to BE: You will always find a grande Starbucks hot coffee costing more than a medium one from Dunkin by a few bucks. Loyal consumers of Starbucks are conditioned, and willing, to pay more regardless of the coffee’s quantity.
4th Example: Playing slots
Principle: Gambler’s conceit—is a fallacy that someone can stop a risky behavior while still engaging in it.
Example: When a gambler believes he can stop the game when he becomes a net winner or he can quit when he wants to” at the roulette table or slot machine but doesn’t exert the self-control.
Relation to BE: Players are encouraged to continue playing as they are winning to continue their lucky streak and continue playing while losing in order to win back money. This performance of risky behavior is continued by the gambler against his best interest which makes quitting unlikely.
5th Example: Taking work supplies
Principle: Rationalized cheating—when individuals rationalize cheating to avoid thinking of themselves as cheaters or as bad people.
Example: A person is more likely to go home with pens or an eraser from his office than the money in cash of equivalent value.
Relation to BE: Most people tend to rationalize their behavior by arranging it as doing something (in this case, taking) rather than stealing. The willingness to cheat escalates as people acquire psychological gaps from their doings.
These behavioral economics principles play vital roles on how we live our lives. By understanding the impact they cause on our behavior, we can deliberately work to reshape our truth.
“We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we made and the direction our life takes; but, alas, this perception has more to do with our desires—with how we want to view ourselves—than with reality.” –Dan Ariely, Ph.D.
Knowledge of behavioral economics helps us gain understanding about our actions so we are capable of making better decisions and cherishing our lives in the driver’s seat.