On Behavioural Economics

I have just finished reading two books on behavioural economics, a topic that I have been interested in for some time but more so during the COVID-19 pandemic. Many of us who follow economics may have adhered to the notion of rational human beings as the basis for all economic principles. Every decision an economic agent, i.e. every one of us, makes is a carefully calculated one based on the information one has at the moment. However, according to Behavioural Economics: A Very Short Introduction, in real life, divergence from this appears more too often. “Our decisions are affected by social and psychological influences, as well as a rational calculation of benefits and costs” (Baddeley, 2017). Decision to buy, for example, does not follow the incentives of price and quality. We are often influenced by a number of factors. The availability factor – the information or memory one can quickly draw – has guided many of our decisions. You may know friends or relatives who are weary about going on a plane because of the vivid headlines on plane crashes even though air travel is, as data suggests, one of the safest ways to travel. We are also reluctant to move beyond our default options in a number of things ranging from installation of computer softwares to retirement plans. Time and time again, we decide based on certain reference points. When you are looking for a television set and found out that three of your friends have recently bought one each for USD500, you are likely to be prepared to pay roughly similar amount while in fact you can get it much cheaper.

Turning to COVID-19, several analyses have concurred that some of the most successful measures to control the virus require a high degree of localised efforts. This, together with the fact that the front line of the fight against any disease lies with each individual person, makes it even more useful to include some behavioural economics data such as how people in an area respond to an outbreak of a disease. What influence people’s decision to leave home and see doctors. Even food-buying behaviour may also be relevant.

Once the data is gathered, policymakers can employ some ‘nudges’. According to Thaler and Sunstein, a ‘nudge’ is a choice architecture that influences people’s behaviours but does not prohibit people from choosing otherwise. Since behavioural economists argue that people tend to exert their inertia. They tend to stick to default options. If governments/local authorities make these default options something that would be good for their health, a small change can lead to satisfying results in disease control. Hence, application of behavioural economics can become an effective tool to help local governments decide policies and measures that are effective and appropriate to respective communities. Having gone through the peaks, many governments can still use information on people’s economic behaviour to design and implement economic recovery plans.

Behavioural economics seems to me to be a very interesting field which opens up ways to see and solve problems from different perspectives. It is certainly something that I wish to continue reading on.