Welcome to behavioural economics
No economics course that I have ever done has mentioned behavioural economics. Yet today I attended a meeting of the Ofcom Consumer Panel at which we had a paper and a discussion on the subject and coincidentally today the “Guardian” had a feature on the topic.
So what is?
Behavioural economics incorporates insights from psychology into standard economic analysis with the aim of generating more realistic theories about how individuals make decisions and the impact this has on markets. At its core it involves relaxing the standard assumption that individuals are rational and self-interested. Instead it recognises that individuals are subject to a variety of cognitive limitations, impulses and emotions.
It has been a niche field for a couple of decades but has recently entered the mainstream within economics. One of the driving forces behind this was the award of the Nobel Prize in economics in 2002 to Daniel Kahneman, one of the most important researchers in the field. Also, the growing use of experimental methodologies has revealed many weaknesses in economists’ standard assumption that individuals are rational (i.e. that they do not, on average, make mistakes).
As the “Guardian” article puts it:
“.. contrary to economic belief that more choice is better, confronted with too much complexity, we make bad decisions, or stick with what we have already got.”