5 Truths about Behavioral Economics and Studying Consumer Behavior

by Diana Drake

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.

11 comments on “5 Truths about Behavioral Economics and Studying Consumer Behavior

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

Leave a Reply

Your email address will not be published. Required fields are marked *