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.”
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.