The Study of Human Psyche in Economics

ABSTRACT

Ever wondered what factors lead to a customer buying one product instead of another? What makes a customer likely to spend more during a sale period than what he intends to spend during a non-sale period? All the answers & factors relating the human psyche with economics lie within the branch of economics known as ‘The Behavioural Economics’.?

INTRODUCTION

Behavioural Economics and Nudge Theory (A major part of Behavioural Economics) offer a range of techniques that help to study human behaviour related to one, For e.g., eating, shopping etc. The below-given content glances as to what Behavioural Economics is, how it is being used for policymaking by policymakers of companies and countries for the betterment of customers & residents, improving and raising their living standards as a whole. Behavioural Economics incorporates the study of psychology into the analysis of human decision making behind an economic outcome. What makes this aspect of economics different from other branches is the fact that it allows for irrational behaviour rather than limiting the art of decision making entirely on the basis of cold-headed logic.

REVIEW OF LITERATURE

Behavioural Economics is one of the many branches within economics which seeks to incorporate a more realistic approach and insights from psychology about the behaviour of an individual into economic models.

Brian Wansink’s (2015) article on using the ‘CAN’ approach and activism research to change behaviour provides a framework of techniques used in multiple interventions. It explains, taking eating habits of individuals into consideration, that successful interventions focus on techniques that make food more “convenient be it physically or cognitively, attractive be it comparatively or absolutely and more normal be it perceived or actual”. Interventions related to convenience often highlight the offering of pre-cut fruit, such as apple slices, due to the inconvenience or inability to bite directly from the apple reported by some adults and children. Although the study focused on pre-cut fruit offered in cafeterias for children, results showed a significant 70% increase of children choosing fruit has implications for increased sales of fruit in convenience stores, where individuals are looking for a snack that is quick and easy to consume in a car (Wansink, Just, Hanks, & Smith, 2013).

The overall objective of this field of economics is to improve our understanding of behaviour in such a way that allows economists to make better predictions and suggest better economic policies. While many economists haven’t explored much in this territory, the past decade showed a growing interest in understanding how certain assumptions about day to day human behaviour about information processing or individual preferences may impact present and future economic models and pave the way for a more accurate analysis.

Behavioural Economics - The Econometrics of Human Actions

This relatively new field that combines insights from judgement, psychology, decision making and economics to generate a better and accurate understanding of human behaviour was conceptualised by Dr Richard Thaler. He was awarded the Nobel Prize in Economic Sciences in?2017 for his pioneering work in this field and for incorporating psychological assumptions into the analysis of economic decision-making. This concept can also be applied to individual situations and can encompass the wider actions of society, including trends in financial markets. It is particularly useful for marketers and companies which want to increase revenue by encouraging changes in consumer behaviour and thus may also be used for setting public policy purposes.

Dr Richard Thaler is well known particularly for his work on ‘Nudge Theory’, a term framed by him to explain the small interventions which, however manipulative to the detriment of an individual, can encourage him/her to make different decisions.

The Basic premise upon which the Nudge Theory is laid upon is:

"People are really bad at doing what they know they should do. They are bad at making the right choices, even in simple circumstances & are worst at making the right choices in complicated and high-stakes matter. Hence, sometimes, ‘Nudge’, i.e. a push is what is required to trigger the rational thinking process and make the person get back on the right track."

Following are a few examples of Nudge Theory:

General Shopping:?

This includes the consumer’s behaviour when face-to-face with the seller, or the pre-purchase behaviour of the consumer, according to the available information collected by the customer up to that point. Emphasis could be given to the post-purchase results and reactions of the existing consumers in order to evoke positive & happy feelings (about the performance of the good) that will lead to additional word of mouth and loyalty to the company’s brand. Suppose a commercial on TV advertises ice cream at an attractive price and quotes that all human beings need 2,000 calories a day to function effectively, the mouth-watering ice cream image, price, and seemingly valid statistics may lead John to falls irrationally into the sweet temptation and fall out of the weight-loss bandwagon, showing lack of self-control. Hence, the ‘choice environment’ of the consumer can be changed to influence his/her behaviour, especially when products are marketed through attractive discounts, advertisements and celebrity endorsements, which encourage consumers to spend more money.

The Government on E-Cigarettes:?

The Department of Health worked with the behavioural insights team on the regulatory framework for e-cigarettes, viewing them as potentially beneficial in helping the smokers to quit, which made the government substitute a similar behaviour instead of trying to eliminate the entrenched one. This caused people to start vaping.

This behaviour was observed by Bryan W. Heckman & others (2018) while conducting their research for ‘Society for the study of Addiction’ in which they concluded that smokers who vape daily had been formerly heavy smokers who have almost completely substituted vaping for cigarettes. However, they still remain susceptible to relapse to heavy smoking.

Eating Outlets:?

Our eating habits/behaviour are also affected by the policies made by the policymakers and companies in an attempt to encourage a healthy lifestyle like Google and Facebook. An order placed at McDonald’s is followed by an old policy of asking if the customers want to super-size their order, i.e. converting a medium meal into a large meal by giving a few bucks more, and it turns out, people usually go for it.

On the contrary, research conducted by Janet Schwartz and colleagues find that if the same people are asked to downsize their order on the side dishes, they often do, thereby eating 200 fewer calories on an average.

Public Health:

Since humans are emotional and easily distracted beings, they tend to make decisions that are not in their self-interest. For example, according to the rational choice theory, if John wants to lose weight and is fully equipped with information about the number of calories available in each edible product, he will choose the food products with minimal calories. In this case, behavioural economics states that even if John wants to lose weight and sets his mind on consuming healthy food going forward, his end behaviour might be subject to cognitive bias, social influences and emotions.?

Johnson and Goldstein’s (2003) study on organ donations remains one of the most classical examples of behavioural economics being applied to public health. They showed how simple interventions, such as registering individuals by default on the organ donation register (they have to opt-out if they don’t wish to be a donor), could significantly increase organ donations.

Parkes, Greenhalgh, Griffin and Dent (2008) conducted research in which they found out that giving patients some feedback as to how they are doing in relation to their treatment and progress can trigger and motivate people to improve their behaviour and stick to?their treatment. This has been used to convince smokers to stop smoking by comparing the health of their lungs with the health of the lungs of non-smokers.

Automatic Vs. Reflective Thought:

Our brains tend to automatically respond to things/stimuli before we are able to stop it from screwing things up. One of the most common examples is the time when students, however smart, tend to make high-impact decisions according to their gut reactions, and as a result, bad things occur. There is a need to push them to double-check their impulses in order to make the right decisions.

In addition to this, people keep doing what they’ve been doing, even if they know or get to know it’s not the best thing to do. Automatic thinking is easy, whereas taking reflective decisions require time and effort.

All of the applications & implications doesn’t mean that Nudge Theory or Behavioural Economics is simple and easy for companies and policymakers to apply. A recent example of Uber shows that it may be used in a wrong way as well:

Transportation Service Provider (Uber):?

With over 100+ social and data scientists, Uber experimented with graphics, video game techniques and rewards of little value, which may push drivers into working for longer durations, even at hours and locations that are less profitable for them. According to an article written by Noam Scheiber, an approach like that compels drivers to collect more fares, based on the insight that people are highly influenced by goals. Uber alerts drivers as soon as they try to log off their systems that they are close to hitting a considerable target, and at times, sends the drivers their next fare opportunity even before their current ride is over.

Hence, Behavioural Economics principles have major consequences on how we live our lives. By understanding the impact they have on our behaviour, we can actively work to shape our own realities. As Dan Ariely, PhD, says in his book, 'Predictably Irrational: The Hidden Forces That Shape Our Decisions', “We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we made and the direction of our life takes; but, alas, this perception has more to do with our desires—with how we want to view ourselves—than with reality.” Awareness of behavioural economics helps us comprehend our actions so we can make better choices and live our lives in the driver’s seat.

CONCLUSION

The article summarised above offers some valuable insights into behavioural economic techniques that can nudge behaviour given changes through the framework of convenience, appeal and normative beliefs, choice architecture, and providing salient information in easy-to-understand formats. Results may vary across intervention techniques with some less complex and lower effectiveness. However, all the research being done in this field of economics is limited and is still in process so as to learn more about this concept which would definitely help in making the economic policies and models in the coming future.