Behavioural Economics – A new branch

What is the issue?

• Richard Thaler (2017 Nobel economic laureate) is credited for having developed ‘Behavioural Economics’ as separate stream.      
• Behavioural Economics deals with ‘nudge’ philosophy and how it can be used to encourage certain outcomes.

Why is it about?

• The irrationality of human mind is what results in the increase in the sales of a commodity when its price is changed from Rs.1,000 to Rs.999.99.
• Often, even perfectly rational people tend to behave irrationally.
• Humans were found to be irrational in a systemic way & hence economists always believed it could be theorised.
• Mr.Thaler showed that even small departures from rationality can have big impacts and that classical economics doesn’t capture this.
• His work to study the interplay of human psychology and economic forces contributed to the development of behavioural economics.

Where can it be applied?

• Its most prominent application is in constructing choices.
• The way in which a choice is framed has been found to influence chooser behaviour and skew outcomes.
• Choice architects can thus ‘nudge’ choosers in a direction of their preference by designing choices accordingly.
• For instance, by making a pension plan the default option, while giving people the choice to opt out, people can be ‘nudged’ towards subscribing it.  
• In dealing with unhealthy eating habits, an extreme solution would be banning fatty food or imposing an additional tax on such food.
• On the contrary, nudging could be employed to promote healthy eating by more prominently displaying the healthier food options in shops.  

How are its larger implications?

• Development policies become more effective when combined with insights into human behaviour.
• The behaviour-informed approach to policy-making recognises two systems of thinking – automatic & analytical.
• Herding - When people are nudged to think quickly, a herd behaviour usually develops and automatic thinking happens.
• Social media phenomena are largely rooted in automatic thinking were people are coerced into subscribing to the trend.     
• People might actually change their views when they are given time to think analytically.
• Moderating Opinions - In an experiment in the U.S. people were asked in distinct ways, for their views on controversial topics.
• In the first approach, people were asked why they held certain believes - which recieved argumentative & polarisation responses.
• Later, when the same people were asked to explain how their believes worked - more softer answers came up.

Source: The Hindu