5 Truths about Behavioral Economics and Studying Consumer Behavior
1️⃣ Joining forces. In the past three decades, psychologists and economists have united to study how people process information and make decisions. The result? The field of behavioral economics. In his research paper Behavioral Economics and Health, Judd Kessler, a professor at the Wharton School of the University of Pennsylvania, explains it like this: “Behavioral Economics is a field at the intersection of economics and psychology. Standard economic theory is built on the assumption that individuals are fully rational, completely selfish, forward-thinking decision makers. This set of assumptions has allowed economists to predict behavior using simple and tractable analytical models. But research from both economics and psychology has demonstrated that individuals regularly deviate from the predictions of standard economic theory and do so in systematic ways.” Behavioral Economics studies the “why” of that deviation to build more accurate models of human behavior, which can then inform business decision-makers, markets and policymakers.
2️⃣ Need an example? We’ll borrow one from this Wharton Global Youth essay featuring high school students interested in behavioral economics. Rachit S., a student at La Martiniere for Boys in Kolkata, India, takes an experience from his own life to illustrate behavioral economics: “I’ve made an interesting observation when I go shopping with my grandmother. The available products are always changing. But I realize that we stop more often in the shops that offer wider selections of things to buy. That is expected, right? But here’s where it gets curious. We actually buy more often from the shops that provide fewer choices. This theory is called decision paralysis. Whenever our brain is faced with a complex decision, it either tries to take a shortcut or to avoid the decision entirely — so, when shopping we might buy less. In contrast, the shop with fewer options presents a simpler decision, and thus better conversion.”
3️⃣ The key to change. Katy Milkman, a Wharton School professor of operations, information and decisions, is a well-known behavioral economist. She wrote the national bestseller How to Change: The Science of Getting from Where You Are to Where You Want to Be and is the co-founder and co-director of the Behavioral Change for Good Initiative, a research center at the University of Pennsylvania that works to advance the science of lasting behavior change. Dr. Milkman’s research, in collaboration with others, explores the ways that insights from economics and psychology can be used to change behaviors for good, like exercise, financial savings, student achievement and discrimination. She told Knowledge@Wharton: “One of the things I’ve learned over the course of doing research on this topic is that a lot of organizations and individuals that are looking to create change just reach for off-the-shelf solutions that sound nice and that have been written about in other bestsellers before — books about setting big, audacious goals, for instance, or visualizing success. That sounds great, but what’s missing is a real appreciation of what is the barrier to change in your particular situation, because what’s going to work depends on what’s holding you back.” When it’s time to make (and keep) new year’s resolutions, Dr. Milkman is a popular guest on shows like NPR’s Planet Money.
4️⃣ Impacting public policy. As a policymaker better understands what drives human behavior, he uses lessons from behavioral economics to achieve public policy goals, or address the problems that societies face. For example, the Behavioral Change for Good Initiative, led by Katy Milkman, partnered with officials in the city of Philadelphia, Penn’s hometown, to design a vaccine-incentive program. The goal: increasing COVID-19 vaccines in the city. The results of the study were published in Nature Human Behavior and summarized on Wharton Business Daily on SiriusXM.
5️⃣ The decision three-step. Economic and psychology insights into consumer choice and decision-making can have powerful implications for business — everything from how a retailer guides the decisions a shopper makes, to a manager’s awareness about what motivates or demotivates employees (motivation). Business students are increasingly using a multi-tiered economic approach that also includes brain science to examine the decision process and prepare to apply what they learn to issues in the business world. Sophia Feldman, a University of Pennsylvania sophomore studying cognitive science with a minor in consumer psychology at Wharton, explains it like this: “The way we see it is a three-step approach to addressing a problem. Start with an economics layer to understand concepts like opportunity cost. Then, use behavioral economics to understand the problem from a more visible approach. What are the behaviors that play from a psychological standpoint and some theories to explain the outcomes? Then we look at the neuroeconomics where scans show us activations of different parts of the brain. We can put all the pieces together. This was the decision, this was the behavior, and now let’s look at the neural mechanisms at play that caused the outcome.”
Conversation Starters
What is behavioral economics and why is it important to business and society?
Wharton’s Katy Milkman says that changing behavior requires you to understand “what is the barrier to change in your particular situation.” What does she mean by this? Can you think of an example in your own life and apply that strategy? If you need more guidance, check out this approach from Angela Duckworth, a Wharton and Penn professor who is also co-director of the Behavior Change for Good Initiative.
One of Global Youth’s most popular essays of all time is cited in No. 2 of this article. A high school student discusses how she is exploring her deep interest in behavioral economics. Are you also interested in this topic? What steps have you taken to learn more about behavioral economics? Share your story in the comment section of this article.
Behavioural economics – the delightful union of psychology and economics. It’s like watching Sigmund Freud and Adam Smith go on a blind date and discovering they have more in common than they thought!
This article brilliantly highlights the fascinating truths about studying consumer behaviour and the quirky ways in which we humans make decisions.
I couldn’t help but chuckle at the high school student’s observation about shopping with their grandmother. Who knew that decision paralysis could strike at the sight of too many options? Perhaps we should all start gravitating towards shops with fewer choices to simplify our lives and increase our conversion rates. It’s a win-win situation for both our sanity and the economy!
And let’s not forget Katy Milkman, the behavioural economist extraordinaire, who knows a thing or two about changing behaviour. She’s like the magician of motivation, waving her wand of insights from economics and psychology to unlock the secrets of lasting behaviour change.
But it’s not just about personal change; behavioural economics has the power to impact public policy too. Just look at the vaccine-incentive program in Philadelphia. Using lessons from behavioural economics to encourage COVID-19 vaccinations is a stroke of genius. Who knew a nudge in the right direction could be so effective?
Lastly, I couldn’t help but smile at the three-step decision approach outlined by Sophia Feldman. Economics, behavioural economics, and neuroeconomics all come together like a harmonious trio of brainy detectives.
They investigate the opportunity cost, unravel the psychological mysteries, and finally peek inside our brains to understand the decision-making process. It’s like solving a thrilling mystery novel, but instead of a whodunit, it’s a wrydidyoudoit.
So, here’s to behavioural economics, the delightful blend of logic and quirks that help us understand ourselves and the world around us. Cheers to the economists and psychologists who continue to unravel the mysteries of our choices, one study at a time.
In the financial market, traders have traditionally relied on two main types of analysis: fundamental analysis and technical analysis. However, sentiment analysis has emerged as a popular concept among individuals as it holds the potential to provide insights into price movements. While algorithmic trading dominates in larger institutions, the crypto market still largely reflects the decisions made by people. Therefore, understanding market sentiment and people’s behavior can be instrumental in effectively predicting market trends.
In Mongolia, the crypto boom of 2021 attracted widespread interest, even the taxi drivers I encountered. Despite traditional positive indicators, I speculated that the market might be oversaturated and headed for a burst. Unfortunately, my speculation proved accurate, leaving many facing financial burdens.
This article was insightful as a preface to the Behavioral Economics course that I will be taking for the Pre-Baccalaureate Summer 2 session. I like how the article lays out that economics is not a simple formula because it is fueled by human actions, which can be erratic.
However, I found the description of reality not matching the research rather confusing. The part read: “But research from both economics and psychology has demonstrated that individuals regularly deviate from the predictions of standard economic theory and do so in systematic ways” (Drake 1). This claim was then backed up with evidence from an anecdote of a student shopping at locations with his grandmother. Rachit says that he looked at more stores with a larger number of products, but he ended up buying more at locations with fewer options. This is because of decision paralysis and how humans naturally look for shortcuts to difficult tasks. The theory may be correct in its own right, but I believe that the example does not show deviation from economic principles, and there are instances where that theory does not apply.
For example, my family and I love to shop for groceries and other goods at our local Costco. Anyone who has seen the store layout of Costco understands their business. They sell items at a wholesale price, and their location acts as a warehouse for customers. Now, when my family and I shop at Costco, the opposite effect is seen with decision paralysis. Instead of freezing up at the site of boxes and goods piled on each other, we end up buying more than we intended. This situation experienced by my family and many others is what many have dubbed “The Costco Effect.” The Costco Effect in simple terms is when customers see the amazing wholesale deals on products and end up having a spontaneous urge to buy that item. The result is an extra cart full of goods that you did not intend to originally buy. This phenomenon is contrary to decision paralysis. A better term for what is happening would be decision hastening. The plethora of products may truly overwhelm the senses, but the customer does not buy less. They are faced with the conundrum of having a killer deal while wanting to move on to the things they intended to buy in the interest of time. The customer then makes a quick decision and buys the product. Thus, the customer buys more even when there are more options.
Either way, the article was an excellent read to prepare me for my upcoming education at Wharton for the Behavioral Economics course. I’m excited to hear from the professors and meet new people!
Hi Zachary!
I admire your detailed and insightful explanation of the Costco Effect. Your perspective has greatly enhanced my understanding of this fascinating phenomenon. The Costco Effect refers to the tendency of consumers to encounter a wide variety of competitively priced items and make impulsive purchases beyond their initial plans. While it may seem contradictory to decision paralysis, a closer examination reveals that these concepts are distinct from each other. Rather than negating decision paralysis, the Costco Effect represents a separate aspect altogether, making any direct comparison somewhat flawed from a logical standpoint.
Like many other companies, Costco reaps the benefits of bulk purchasing, a concept referred to as “economies of scale” in economics. By implementing this strategic approach, Costco successfully reduces its average total cost. Consequently, they are able to offer highly competitive prices while maintaining profitability. As a result, Costco has gained a reputation for attractive pricing and continues to thrive by enticing customers to make more purchases than originally planned.
Rachit’s example demonstrates how having multiple choices can often result in purchasing fewer items due to decision paralysis. However, when Zachary was presented with a wider range of products, he tended to buy more, which is commonly known as the Costco Effect. Realize that these seemingly similar situations yield different outcomes. The reason behind the Costco Effect is not solely based on the availability of more options but rather stems from the value proposition created through economies of scale, resulting in lower prices. While Rachit solely focuses on quantity without considering pricing, the Costco Effect takes into account both quantity and pricing. It’s important to note that you emphasize the significance of “the amazing wholesale deals.” This distinction highlights why these two scenarios result in different outcomes and emphasizes the importance of understanding how prices influence consumer behavior.
The disparity in this comparison has been identified. Now, let’s explore its implications for behavioral economics, specifically focusing on decision paralysis. Although you suggest that there might be exceptions to the rule where individuals experience a “spontaneous urge to buy that item” without hesitation, I respectfully disagree. In most cases involving a wide or narrow range of options, I believe humans tend to make decisions more swiftly when faced with fewer choices—unless external factors impede their hesitation. The impact of competitive prices, exemplified by the Costco Effect, can substantially influence and artificially alleviate hesitancy in the presence of an extensive variety of products.
To validate my hypothesis, I undertook an experiment involving two friends, Ethan and Jack. To ensure authenticity, I accompanied them to both Costco and Target without disclosing the study’s specifics. I established a crucial rule: any items they purchased from either store would undergo price matching. I clarified that I would either charge them extra or provide a discount based on the calculated average derived from the price per ounce at both stores. This approach effectively eliminated the influence of Costco’s wholesale prices from our analysis. As a result, we solely focused on their decision-making patterns when faced with varying product quantities.
During this stage, the only variable was the variety of products. This gave me an opportunity to conduct a meticulous test on decision paralysis without distractions caused by price fluctuations. Our focus then turned towards Costco, where we encountered an impressive array of 39 different types of chips. Ethan took precisely 3 minutes and 17 seconds to make his choice, while Jack dedicated considerably more time—5 minutes and 43 seconds—to contemplate his decision. After completing our shopping at Costco, we proceeded to Target in search of sparkling water. The objective of switching items was to optimize our decision-making process and avoid encountering diminishing returns. Target provided us with only 12 choices to select from. Once again, I recorded the decision times of both Ethan and Jack. Ethan made his choice in 1 minute and 2 seconds, while Jack took slightly longer at 1 minute and 32 seconds. The reduction of available options by 27 resulted in a significant decrease in decision time. Ethan managed to reduce his thinking period by an impressive 68.5%, while Jack made an even more substantial improvement by reducing his deciding time by a staggering 73.2%.
What can we infer from this data? It becomes clear that removing external influences, such as price, reveals a lack of a “spontaneous urge.” Instead, hesitancy increased as the amount of available products increased. This suggests that decision paralysis remains prevalent even in your case, Zachary. It seems that the allure of lower prices likely drives the concept of a spontaneous urge. When individuals believe they are already saving money, they tend to invest less time in maximizing their purchase’s value.
I appreciate your comment, Zachary, as it pushed me to take a real-life initiative and dig deeper into my interests in behavioral economics.
The fascinating world of behavioral economics blurs the boundaries between psychology and economics, putting human decision-making front and center. It’s like charting uncharted territory, where social, cognitive, and emotional factors play an integral role in shaping economic choices – a labyrinth to navigate with fearlessness akin to explorers before us.
As one delves deeper into the captivating realm of behavioral economics, it becomes clear that this discipline is far from ordinary. Rather, it is like a colorful tapestry woven from the threads of human complexity – acknowledging that we are not robotic decision-makers guided solely by rationality. Instead, behavioral economics embraces the vibrant hues of biases, heuristics, and the intricate dance of our non-selfish motives.
At the intersection of traditional economic theory and behavioral economics, a collision of ideas ensues. Traditional economics posits that people are rational decision-makers who evaluate each choice with mathematical precision. However, behavioral economics challenges this dogma with a fresh perspective that highlights the profound impact of irrational behavior on our decisions–a concept likened to a charismatic rebel fighting against tradition.
The intricate workings of human decision-making in an economic context are unraveled by behavioral economists through meticulous investigation. This creates a clear image of the idiosyncrasies, imperfections, and irrational tendencies present within us. As they delve into our minds – a largely unmapped territory – they shed light on the hidden biases that influence us, the social pressures that guide us, and the emotional triggers along the complex path of decision-making.
Behavioral economics plays a pivotal role in our understanding of the complexities of human behavior. With each new discovery, its power is increasingly recognized by policymakers and businesses alike who look to it as a guiding compass. As they seek to unlock the mysteries of human behavior, interventions and strategies founded upon behavioral economics yield tangible results with increasing frequency.
Behavioral economics has had a significant impact on retirement planning – a realm where nothing is more valuable than our financial stability. Policymakers, drawing upon insights from this cross-disciplinary field, have devised smart ways that nudged people towards securing their futures. By leveraging the remarkable power of defaults and realizing that most people stick to the status quo, they introduced automatic enrollment where anyone who qualifies for a retirement plan is automatically enrolled unless they choose otherwise. It’s an ingenious strategy that has completely transformed participation rates and granted countless individuals greater financial security and peace of mind.
Behavioral economics has far-reaching effects, beyond retirement planning. Consider the shortage of organ donations that puts lives in danger. Policymakers struggle to inspire more donors. The traditional opt-in system is ineffective since it requires individuals to take active steps towards donation. However, with a touch of behavioral economics, a new system arose that automatically enrolls individuals as donors while still allowing them the freedom to decline if they so choose. This marriage of choice and social impact led to an increase in donations and gave hope while saving lives.
In the bustling city of Berkeley, California, they continue to fight against rising obesity rates. Policymakers have adopted behavioral economics principles to tackle this issue head-on. Their solution? To introduce a soda tax that works in tandem with our decision-making preferences. By implementing a per-ounce fee on sugary drinks, they have created an undeniable price increase that encourages us to make better choices for our health. This clever tactic serves as a constant reminder of the impact our decisions can have and gradually shapes healthier habits one sip at a time.
Philadelphia officials have taken a proactive approach towards increasing COVID-19 vaccination rates by applying behavioral economics principles. They partnered with the Behavioral Change for Good Initiative to design an incentive program that harnesses behavioral insights and encourages vaccination. The program consists of various techniques that reward individuals upon vaccination, such as leveraging peer influence and social norms and simplifying decision-making. Additionally, it addresses psychological barriers to increase vaccine uptake amongst hesitant individuals. According to Nature Human Behavior, the program has been successful in boosting vaccination rates in Philadelphia. The application of behavioral economics in policymaking is an innovative approach that has proven effective in tailor-making interventions. This sets a landmark precedent for utilizing insights on behavior to tackle complex public health challenges.
Behavioral economics has transformed the game by reshaping companies’ approaches to consumers. It’s as if a hectic marketplace were infused with the subtle details of consumer psychology that drive sales and grab our attention. These businesses know that even minor changes to design or presentation can reap tremendous outcomes. For instance, adjusting font size, carefully placing nutritious options alongside highlights of vibrant colors could send waves through the entire landscape of consumption. To observe this phenomenon in action, take a stroll down one of Mexico’s local grocery stores. Certain items are cleverly highlighted in larger fonts, capturing consumers’ attention and resulting in a 10% increase in sales. Healthy food options proudly stand at the forefront, alluring customers with their enticing appeal, and sales soar by an impressive 29%. It’s almost as if the shelves themselves come to life, revealing secrets of buyer preferences and guiding businesses towards prosperity.
Coca-Cola, a global giant in its own right, has embraced the power of behavioral economics. These days, their vending machines are no longer hidden away in black – they’ve undergone a wondrous change! By switching to red, these dispensers of refreshment now radiate an irresistible energy and buzz that’s all-too hard to ignore. As if drawn by some supernatural force, consumers gravitate towards these glowing beacons of liveliness and enthusiasm – with results speaking for themselves: sales have soared by 7%. It’s like music to our ears as we watch color psychology and business strategy blend together in perfect harmony.
Behavioral economics’ allure lies in its ability to reach beyond the pursuit of profits and usher in a new era of social consciousness. Take an online store like Amazon, where algorithms merge with our insights on behavior to influence our choices. The “Frequently Bought Together” feature becomes a trusted companion, steering us towards maximum convenience and satisfaction. Businesses can thrive while promoting choices that benefit both consumers and society: with just a suggestion, sales skyrocketed by an astounding 60%.
The field of behavioral economics combines insights from both psychology and economics to paint a rich picture of human decision-making. It uncovers the complex fabric of our choices, woven together with inherent biases, social norms, and emotional factors. This adds to policymakers’, businesses’, and society’s understanding of how we navigate through economic situations. It’s an important element of society which is increasingly becoming incorporated due to the wonders it works. It allows for policymakers to implement new policies for public benefit with less resistance, while also aiding businesses in raising profits.
Behavioral economics has captured the imagination of many and revolutionized our understanding of human behavior. One must embrace its vibrant personality and celebrate its capacity to reveal the depths of our quirks and foibles. This field has the power to guide individuals towards choices that ultimately lead to better outcomes. As active participants, one can explore the realms of cognitive, social, and emotional factors that shape economic destinies in a mesmerizing journey. Let behavioral economics be the guiding star illuminating the path towards a brighter future full of informed decisions.
Behavioural economics takes place everywhere, and in some ways that it does, it could turn sour quickly, as it did with me.
Firstly, common examples of behavioural economics taking place like products having certain branding styles to manipulate consumers’ choices at the supermarket aren’t something horrific.
However, most people overlook the first 5 words of this comment. Tiktok, Snapchat, Instagram, Facebook and Twitter. What do all these apps have in common? They’re all social media. What else do they have in common? They all contain algorithms. These algorithms are designed by companies worth billions of dollars to have the sole purpose of increasing user retention. These algorithms continuously collect data regarding the types of posts you interact with and for how long, leading to an algorithm getting to know you better. Using this data, the algorithm then displays personalised content that you showed peak interest in in the past to make you stay on the app longer. Behavioural Economics, if you will.
Thus, incoming the biggest war every teen has to fight in 2023. The mental fight against algorithms. A young developing mind, susceptive to everything in its environment and drowning in academic pressure. It wouldn’t be hard to find refuge in a small rectangle screen that releases massive amounts of dopamine (a happy chemical in our brain) with a simple swipe of a finger. That’s where my personal story comes in.
Semester exams were incoming though not before I had to tackle the last few graded assignments. Additionally, I had weekly sports training in and out of school which I had to juggle with tuition, it was all piling up internally. Circumstances had poured a tablespoon’s worth of ingredients onto my teaspoon-sized mental capacity.
I had to deal with my situation somehow, consequently, like many of my fellow Gen Z’s, I succumbed to my phone. Every time I sat down to work at the same work desk I type out this comment on, a tsunami of dread would overflow me. To escape, I would indulge in excessive amounts of social media till hours would tick by. My procrastination was caused by fear of doing the task at hand. I always felt like it was too much to handle so, I procrastinated, which only made matters worse! Instead of loosening my schedule to help me rejuvenate and ace my exams, I fell into a rabbit hole of stimulation in an attempt to mask my struggle from myself, it was an escapist reality.
Fast forward to exam results. They were not up to the standards I had set. This was followed by my parents being discontent and stripping me off all my devices, the biggest culprits.
The interesting thing is only during the period I was deviceless is when I realised I had formed an addiction.
Point is anyone can form an addiction when faced up against a perfectly tailored algorithm, especially when exposed with a weak state of mind. However, I learnt my lesson and I did what one has to do in such a situation, be aware. Be aware of the thing you are consuming is so addictive because of mountains of data collected in order to target one’s psyche (psychology part of behavioural economics).
To conclude, I’ve made the change, it’s been 4 months since I’ve disconnected from every social media leaving me with only 2 messenger apps to stay in contact with family and friends. I’m consistently more focused now.
Behavioural economics has been rightly defined as a field at the intersection of economics and psychology. Psychologists and economists together study how people make decisions and what processes come into play in their minds to come to that conclusion. There are references to the standard economic theory that individuals are entirely rational which enables economists to predict human behavior using analytical models.
This however does not stand the scrutiny in the real-life situation always. It is claimed that research in both economics and phycology has shown that individuals regularly deviate from the predictions of standard economic theory.
Such deviation in human behaviour is more than an exception. The choices people make even in the most routine matters such as buying shampoo or toothpaste may not conform to the day’s market trends. They instead go for the brand they have been using for a long time and have no intention of shifting to another brand.
The conclusion that there is ‘decision paralysis’ when people are faced with a wide variety of choices in a store proving how people naturally look for shortcuts to difficult tasks also goes contrary to real-life situations. The ‘Costco effect’ describes it succinctly and drives home the point. It is rightly said that the response of a buyer when faced with a plethora of products in a store is the opposite of decision paralysis. He gets overwhelmed by what he sees and often ends up buying more than he/she planned for. I have seen this happening often in my own family.
The article undoubtedly gives an insight into behavioural economics and also what influences human phycology and brings about changes in his/her behaviour.
Sai-
You bring up an intriguing example of people having “no intention of shifting to another brand.” Furthermore, it is these minute decisions- of what Shampoo brand we purchase- that reveal a lot of human nature. In economist John A. List’s “The Voltage Effect,” he touches on ambiguity aversion. Examples of such demonstrate how humans are prone to seeking familiarity. Through Professor List’s examples on ambiguity aversion and your “decision paralysis” discovery (with the shampoo), economists are able to sculpt society through monetary means. This is crucial to influencing people. Behavioral Economics not only impacts society through public policy (like how Katy Milkman does!), but also through scale. The article fails to mention the importance of scaling, and how it is related to behavioral economics; using postulates such as the Hawthorne or Endowment effect, businesses would be able to model their products, services, etc. to the mannerism of society. Ultimately, understanding how humans and communities function, can lead to greater opportunity for everyone: in Rachit’s case, less options at the grocery store!
Dear Sai,
Thank you for your thoughtful comment. It’s always wonderful to engage in a meaningful dialogue about the intricacies of human decision-making, especially within the context of behavioral economics.
I completely agree with your point about the discrepancies between theoretical models and real-world experiences. The “rational actor” model of classical economics indeed does not always capture the full range of human behaviors, and that is precisely where behavioral economics steps in—to provide a more nuanced understanding of economic decision-making.
Your point about brand loyalty and routine-based buying behaviors illustrates how our decisions can be influenced by factors beyond pure rational economic calculation, such as habit, emotion, or personal attachment. However, it’s worth mentioning that even these behaviors can be modeled within the framework of behavioral economics by considering psychological factors and biases.
As for the point about ‘decision paralysis’, you’re absolutely right that real-life scenarios may vary. While some people may exhibit decision paralysis when presented with a vast array of options, others might experience the ‘Costco effect’, as you mentioned. The diversity in individual responses to such situations underlines the importance of behavioral economics in capturing this variability.
That being said, I believe the examples provided in the article are meant to illustrate general patterns of behavior that have been observed in research studies. They may not perfectly capture every individual’s experience, but they help us understand common tendencies and biases in decision-making. This is why I find the field of behavioral economics so fascinating — despite our distinctive lives, there are still fundamental psychological influences that guide our actions and choices. Whether it’s the inertia of habit, the allure of familiarity, or the fear of loss, these shared undercurrents of human behavior form a compelling tapestry that is as intriguing as it is complex.
Once again, I appreciate your insightful observations, and would be happy to have further discussions on this matter.
Dr. Milkman writes: “One of the things I’ve learned over the course of doing research on this topic is that a lot of organizations and individuals that are looking to create change just reach for off-the-shelf solutions that sound nice and that have been written about in other bestsellers before — books about setting big, audacious goals, for instance, or visualizing success. That sounds great, but what’s missing is a real appreciation of what is the barrier to change in your particular situation, because what’s going to work depends on what’s holding you back.”
This idea might seem intuitive, but it can be very challenging to identify factors that create barriers toward achieving our goals. Dr. Milkman applies this notion to some familiar areas of struggle, such as losing weight and becoming fit. Popular culture often glorifies grandiose resolutions to be thin by touting the latest weight loss plans. In the age of social media, the notion that you can simply fast intermittently or eat a keto diet to lose weight seems so attainable because you see and hear testimonials from others who have done it. But often these plans fail precisely because people fail to ask themselves an essential question: why am I not making progress on my goal? What are my deterrents?
Dr. Milkman’s work applies these principles to understand how people make other decisions, including economic decisions. Her research resonated with me as I developed a financial literacy curriculum that I taught to elementary school students while I was in high school. Although my subjects were young children rather than adults, I gleaned common biases that were pivotal in the decisions that my students made. I thought it was important not just to observe these biases, but to explain them to my students so they were aware of how their individual thoughts, expectations and fears influence their decision-making processes.
On the first day of each session, I gave my students a certain sum to spend or save in our simulated “store”. More often than not, my students spent all the money allotted to them even though I made it clear that any money that was not spent could be saved and invested with the hope of increased returns. Before talking about the practical aspects of spending and saving, we spent time discussing what motivated each of them to make an irrational decision; in other words, what was holding them back from making the sensible choice to save at least some of their discretionary cash for the future? For some students, the lure of immediate gratification was too strong. For some students, visibility bias led them to focus on what their peers were buying (as opposed to saving), thereby motivating them to increase their consumption.
And for others, savings was simply a low priority item — these students did not appreciate the in value of saving money because they believed they were too young, could make more money later in the future, or they would receive assistance from others if they needed it. Shedding light on these assumptions and motivations was enormously productive in getting my students to buy in to the lessons that followed. In particular, when we discussed investing, my students were able to look objectively at what they needed to do to overcome their aversions to saving and investing.
I have asked similar questions to comprehend other phenomena in the realm of economics and elsewhere. By understanding our own barriers to change, we can make significant progress toward self-enhancement while gaining insight into the challenges that hinder others from achieving meaningful change.
Behavioral economics is an economics that combines behavioral theory with traditional economics by studying the behavior of consumers,investors, and the general public to discover investment or business opportunities
It can help investors or decision-makers find commonalities or personalities in qualitative analysis, thereby identifying business opportunities, and is a supplement to quantitative analysis.
When looking at behavioral economics, we must ask ourselves how can we use these concepts to create positive societal change.
As Professor Judd Kessler observes, people do not always act rationality. This may appear counterintuitive: why wouldn’t people consistently make decisions that align with their best interests? The answer lies in the presentation of the choices. For instance, consider the process of becoming an organ donor. Traditionally, this is an opt-in service, where people actively choose to participate (ex: “Would you like to be an organ donor?”). However, when framed as an opt-out service (ex: “Would you like to opt out of being an organ donor?”), the participation rate surges. Spain’s use of a presumed consent law in 1979—automatically enrolling citizens as organ donors unless they opt out—dramatically increased donor numbers, highlighting the power of question framing; despite not changing the essence of the question, it changed the answers given.
We can further see the applications of behavior economics when looking at decision paralysis. As Rachit Surana notes, when shopping with his grandmother, they counterintuitively buy more from stores that offer fewer options. When confronted with an overwhelming array of options, selecting only one becomes daunting. Many corporations have adopted this idea in designing Employee Assistance Programs, offering a few highly recommended therapists tailored to employee needs rather than an exhaustive list, simplifying the decision-making process and increasing the rate of use.
Before I read this article, I would’ve assumed that people always act rationally. However, the field of behavioral economics says otherwise. Not only do people not always act rationally, but they act predictably irrationally. That predictability can be used to create programs that play to the complexity of human behavior.
Hello Jai!
Your comment brings up an interesting point with the opt-in vs. opt-out effects. Many times, humans act out of passiveness. Rather, we don’t act a certain way because of passiveness, and we often go with the default, like your organ donor example. As humans with emotions, our instincts and feelings influence us a lot, sometimes more so than our brain. However, too many inputs—our heart telling us one thing, and our brain saying another, while our gut says a different, third thing—makes us conflicted, so it’s frequently much easier to default to the often simpler original choice.
In fact, I never thought about our behavior as such until you brought it up. Whenever I bought bubble tea, I would always pick my “original” option, which was taro, ignoring the vast variety of other available flavors. Even if I didn’t particularly like the flavor or the tapioca pearls, taro with boba was still my default. Until the other options were specifically pointed out, I wouldn’t have bothered to seek out these changes since they require more thought put into my order, even if they make for a better bubble tea experience. A helpful solution to decision paralysis is when businesses, oftentimes ice cream shops, offer free samples of their products, encouraging buyers to try out different options.
Our irrational behavior isn’t always negative, however. If we always acted rationally, then we would have significantly less choices: we would pick the healthiest food, the most durable clothing, the most efficient transportation. But, as humans, we have our own unique needs and traits, so by our default, we don’t always act how economic theory decides is most rational. For example, the wealth effect states that a higher perceived wealth leads to increased spending, causing asset appreciation of more desirable or wealthy-looking goods. Rational thought tells us that, no, we are not actually wealthier than before, but the feeling of increased wealth or financial security leads to us acting on it. Despite this, asset appreciation causes the economy to grow, a positive outcome stemming from irrational thought. I believe that this wealth effect might be one of the causes for the inflation being so sticky right now. There’s also another factor behind “irrational” behavior. Not everyone is aware of what is considered the best choice or has access to all the information. Sometimes, it’s ourselves who don’t know all the information. Because of this, it might be difficult to understand why other people make the decisions they do.
On the other hand, the wide variety of choices cause the decision paralysis mentioned in your comment and the article. Buying the default taro and boba combination takes much less time than choosing what I actually want, since there are so many options that I have not tried yet. The decision paralysis might actually end up making people return to, again, their default option. Ultimately, there’s a delicate balance between too little and too much choice. Our brains are complicated, and we must learn how to navigate and use our sometimes-irrational behavior in the choices we make.
The world of behavioral economics – the science of why our assumptions are wrong and why humans deviate from norms when making decisions. It’s an interesting blend of psychology and economics that explains our quirks and choices in everyday life.
Rachit S.’s story about shopping with his grandma caught my attention. He noticed that they bought more from shops with fewer choices because too many options can be overwhelming. I not only heard a TED Talk about this a while back, but I can personally relate to this. The more that I think about my daily routine, the more I realize that I am struck by decision paralysis. For example, it ends up taking me hours to find the perfect movie to watch on Netflix, simply because I’m overwhelmed by the plethora of options. This idea of decision paralysis explains why I often end up rewatching my comfort shows instead of trying something new. It’s fascinating how our brains struggle with too many choices, leading us to stick with something that’s familiar.
All of us, at some point in our lives, have been under the influence of behavioral economics. And companies are aware of this; this is why they leverage the concept in their storefront, displays, and pricing. Throughout the comments, I noticed the discord between Zachary N. and Siddarth D. regarding Costco’s variety of wholesale options. Zachary argued that the wholesale prices prompt the consumer to quickly make a decision, even though there was a wide display of items. Siddarth argued that this concept is slightly flawed because it takes into account the effect of the pricing of goods. One prime example (that I’ve personally experienced) of the effect of behavioral economics is Ikea. At first glance, one may think that facing Ikea to walk through a maze of items is a bit overwhelming and can exacerbate our decision paralysis. However, Ikea combats this through setting up rooms, studios, and kitchens. It makes your vision come to reality, and tells you exactly what to buy to make it come true. I myself am inspired by this concept. It translates your thoughts into realities, taking away the entire need to contemplate what to buy; it essentially makes the decisions for you. And Ikea even alleviates the physical demands of buying items since you don’t need to put the items in your cart as you shop; you can simply pick it up at the end of your trip at the warehouse. This allows you to fill up your “mental cart” along the way without having to be burdened by seeing a cartload of goods stacking up. In that way, there is no psychological barrier to how much you can buy. I am definitely a victim of this “Ikea phenomenon,” even though I am aware of its tricks.
One thing that still puzzles me, though, is why we continue to make irrational choices even when we know better, just like my Ikea experience. Many of us know that it’s better to save money, reduce waste, and make thoughtful purchases, but how often do we find ourselves impulsively buying things we don’t need because they’re on sale or part of a “limited-time offer?” Even when we understand that these marketing tactics are designed to trigger impulsive spending, we still fall for them. This behavior highlights a common struggle: why do we sometimes act against our best interests, even when we’re fully aware of the better choice? This paradox of human behavior is a black hole that I’m definitely ready to explore.
Hi Veda!
I found your Netflix example extremely relatable- it helped me connect with the idea that we can be spoilt by choice as much as for it. The idea that we have so much to choose from is so tremendously overwhelming that we face decision paralysis- circling back to a comfortable choice. I find myself doing this every time I visit Starbucks, carefully evaluating each drink when I almost always end up picking a classic Frappuccino after successfully wasting at least fifteen minutes of my very patient barista’s time.
Behavioral economics is the juxtaposition of a field solely based on rationality and logic and another centered around versatility, instincts and sometimes even ambiguity. This junction renders a multifaceted approach that provides an outlook to marketing and purchasing that amalgamates two vastly contrasting, yet uniquely complementing domains. I completely agree with your point about companies leveraging these phenomena and its influence on us being apparent in quotidian instances. Companies are unequivocally cognizant of the complexity of the human mind and its potency in determining what and how we purchase as opposed to absolute rationality. They assuredly capitalize on this, establishing their ad campaigns on behavioral patterns and therefore, subtly guiding our decision- making. I got interested in this field recently and came across a few marketing tactics, that some might called overused, that employ the studies of behavioral economics to attract consumers.
Your IKEA example was something I found really interesting, which got me thinking of other marketing techniques employed by IKEA that fall under the behavioral economics umbrella. While any rational human would pick convenience, people still choose IKEA despite the idea that they must assemble the product themselves. People ascribe a greater sense of value to something that they have created on their own- making this one of the most successful aspects of the Swedish company’s marketing. Another way they increase our attachment to products is by creating model rooms with mirrors so we can see ourselves in the vision we created. The store layout that you also mentioned is something else that exacerbates the impulsivity issue- forcing us to look at things we weren’t here to purchase in the first place. While IKEA is definitely a company that boasts a great marketing mix, rooted in the studies of consumer behavior- a plethora of companies have adopted these ideas to devise a near- perfect marketing plan.
My favorite example would probably be Apple, which brings Walter Landor’s words- “Products are made in a factory but brands are created in the mind,” to life. Apple’s greatest forte would most definitely be its brand imaging, along with its cutting- edge technology. When Apple is selling a product, they are selling much more than a piece of technology- they are selling a lifestyle. This social effect, augmenting in a world that ascribes increasing importance to material judgements, is an exemplary asset to Apple’s marketing strategy. The idea that something that you own is more valuable to you is another one that Apple has used to add finesse to its marketing game by introducing working models for consumers to play about with, they’ve increased interaction between the consumer and the product, making them more likely to pay more for it. Economics will always assume that a consumer is rational, but observing the fanatics lined up to buy the latest iPhone, one can tell that the brand perception of quality- due to its high price- has overridden consumer rationality.
That’s just the enigmatic way the mind functions, its calculations aren’t just an evaluation of supply and demand but an intricate fusion of social, physiological and cognitive cues. As our understanding about this convoluted conundrum grows, we transform the world of selling and purchasing from simply an exchange of money to a field characterized by unfathomable depth and cognizance of the befuddling ways of the human mind.