Behaviour Economics

B E H AV I O U R E C O N O M I C S
SRUTHI RAJ M K
PSYCHOLOGIST
PSYBIZ
“Studies the effect of
Psychological, cognitive,
emotional, social and cultural
factors on the decisions of
individuals and institutions and
how those decisions vary from
those implied by classical
economic theory.”
 Behavioral economics is a field of study that combines economics and psychology to understand how
and why people make decisions.
 Study of how psychological factors influence economic decisions
 It differs from traditional economics, which assumes that people are rational and make decisions that
are in their best interests.
 Behavioral economics recognizes that people are influenced by a variety of factors, including
emotions, cognitive biases, and social norms.
 Behavior models integrate insights from Psychology, Neuroscience & microeconomic theory.
 The study of behavioral economics includes how market decisions are made and the mechanism that
drive public choice.
Traditional Economics: Assumption
of rational decision-making
Behavioral Economics: Recognizes

human biases and limitations
 Behavioral Economics tries to make mix insights from psychology with
economics, and looks at problems through the eye of a “Human”, rather than
an “Econ”.
 It uses insights from psychology to explain why people make apparently

irrational decision such as why people eat too much, take too little exercise, or
do not save enough for retirement.
some of the key concepts in behavioral economics:
Bounded rationality: People are not perfectly rational decision-makers. They have limited
time and information, and they often make decisions based on heuristics (mental shortcuts)
that can lead to errors.
Cognitive biases: People are susceptible to a variety of cognitive biases, which are systematic
errors in thinking. For example, people tend to overweight recent information and
underweight older information, which can lead them to make bad investment decisions.
Emotions: Emotions can have a powerful influence on decision-making. For example, people
are more likely to make risky decisions when they are feeling happy or excited.
Social norms: People are also influenced by social norms, which are the unwritten rules that
govern how people behave in a particular group or society. For example, people are more
likely to donate to charity if they see others doing it.
S O M E B E H AV I O R ( C O G N I T I V E ) B I A S E S
Loss Aversion & The Endowment effect

Fear of Change
Herd Behavior
Framing Effects
Availability Heuristics
Anchoring Effect
Priming
Confirmation bias
1 . L O S S AV E R S I O N
 There are emotional & perceptual asymmetries between losses & gains.
— A loss is more painful than a commensurate gain is pleasurable: losing a Rs. 10
note can be more irritating than finding one is joyful.
— People will go out of their way to avoid losses, while at the same they would not
bother to go out of their way to gain something.
 This is linked to the endowment effect

— People try to keep something that they consider is ‘theirs’, even when it is quite
arbitrarily given.
2. FEAR OF CHANGE
 People are often uncomfortable with uncertainty & therefore fear change.
 We tend to prefer things the way they have always been and invest
additional amounts in past strategies with we have pursued.
3 . S O C I A L ( H E R D ) B E H AV I O R
• Social Learning - we often look to others to see how to behave.
• Expert bias – we are open to influence from people in authority or people we
like, eg- Milgram pain experiment.
4. FRAMING EFFECT
 Framing a question or offering in a different way often generates a new
response by changing the comparison set it is viewed in.
 Asymmetric framing – involves an obviously inferior 3rd choice or a
hyper extensive 3rd option rather than a simple expensive/cheap choice
can guide consumers to more expensively prices items.
5 . AVA I L A B I L I T Y H E U R I S T I C S
• Overestimating the importance of information readily
available
• Impact on investment decisions and risk assessment
6. ANCHORING EFFECT
 Initial information influences subsequent decisions
 Example: Price perception based on a reference point
7. PRIMING
• The tendency for exposure to one stimulus to influence the response to a

subsequent stimulus.
• For example, a grocery store might display images of fruits and vegetables in
the produce section to encourage people to buy more fruits and vegetables.
8 . C O N F I R M AT I O N B I A S
 The tendency to search for, interpret, favor, and recall information in a

way that confirms one's existing beliefs.
 This bias can lead to people making irrational decisions, such as ignoring
evidence that contradicts their beliefs or believing that their beliefs are
more accurate than they actually are.
For example, a person who believes that a particular stock is a good investment may
be more likely to ignore negative news about the stock and focus on positive news.

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B E H AV I O U R E C O N O M I C S

Behavioral Economics: Recognizes

 It uses insights from psychology to explain why people make apparently

Loss Aversion & The Endowment effect

 This is linked to the endowment effect

• The tendency for exposure to one stimulus to influence the response to a

 The tendency to search for, interpret, favor, and recall information in a

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