Read the first post in this series, “”, to hear from Dr. Elizabeth Schwab on an overview of behavioral economics.
Read the third post in this series, “Must-see media list for behavioral economics” to discover a list of resources to help you learn about the field outside of the classroom.
Our days are a whirlwind of activities—rushing from work, to the gym, to the store, and filling our time with errands, meals, and whatever else we need to do before we start all over again the next day. We are so absorbed in our routines that it’s difficult to have an awareness of the factors that influence us. Behavioral economics is so applicable because it explains some of our behavior that we don’t think twice about.
In this post, we explore these questions: what is behavioral economics? How is it that we encounter this psychological phenomenon daily without recognizing it? What are some examples of behavioral economics?
Request infoWhat is Behavioral Economics?
Behavioral Economics is a study that intersects the teachings of psychology and economics. More specifically, as stated by Investopedia, behavioral economics “relates to the economic decision-making processes of individuals and institutions.”
Behavioral economics principles have major consequences for how we live our lives. By understanding the impact they have on our behavior, we can actively work to shape our realities.
Examples of behavioral economics
Example #1: Playing sports
Principle: Hot-Hand Fallacy—the belief that a person who experiences success with a random event has a greater probability of further success in additional attempts.
Example: When basketball players are making several shots in a row and feel like they have a “hot hand” and can’t miss.
Relation to BE: Human perception and judgment can be clouded by false signals. There is no “hot hand”—it’s just randomness and luck.
Example #2: Taking an exam
Principle: Self-handicapping—a cognitive strategy where people avoid effort to prevent damage to their self-esteem.
Example: In case she does poorly, a student tells her friends that she barely reviewed for an exam, even though she studied a lot.
Relation to BE: People put obstacles in their own paths (and make it harder for themselves) in order to manage future explanations for why they succeed or fail.
Example #3: Grabbing coffee
Principle: Anchoring—the process of planting a thought in a person’s mind that will later influence this person’s actions.
Example: Starbucks differentiated itself from Dunkin’ Donuts through their unique store ambiance and product names. This allowed the company to break the anchor of Dunkin’ prices and charge more.
Relation to BE: You can always expect a grande Starbucks hot coffee ($2.10) to cost more than a medium one from Dunkin ($1.89). Loyal Starbucks consumers are conditioned, and willing, to pay more even though the coffee is more or less the same.
Example #4: Playing slots
Principle: Gambler’s Conceit—an erroneous belief that someone can stop a risky action while still engaging in it.
Example: When agambler says “I can stop the game when I win” or “I can quit when I want to” at the roulette table or slot machine but doesn’t stop.
Relation to BE: Players are incentivized to keep playing while winning to continue their streak and to keep playing while losing so they can win back money. The gambler continues to perform risky behavior against what is in this person’s best interest.
Example #5: Taking work supplies
Principle: Rationalized Cheating—when individuals rationalize cheating so they do not think of themselves as cheaters or as bad people.
Example: A person is more likely to take pencils or a stapler home from work than the equivalent amount of money in cash.
Relation to BE: People rationalize their behavior by framing it as doing something (in this case, taking) rather than stealing. The willingness to cheat increases as people gain psychological distance from their actions.
These behavioral economics principles have major consequences on how we live our lives. By understanding the impact they have on our behavior, we can actively work to shape our own realities.
As Dan Ariely, Ph.D., 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 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 behavioral economics helps us comprehend our actions so we can make better choices and live our lives in the driver’s seat.
For more, see the first blog in this series, a Q&A with Elizabeth Schwab, Psy.D., Associate Department Chair for Business Psychology and Program Chair for Behavioral Economics.
Learn more about our online masters in behavioral economics hereand must-see media options for behavioral economics here, or fill out the form below for more information.
