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Saturday 19 Aug 2017 | 18:07 | SYDNEY
Saturday 19 Aug 2017 | 18:07 | SYDNEY

More on behavioural economics



16 August 2011 14:25

I had some private feedback on my brief behavioural economics post of last Friday, so I want to say a little more about what I think the term means.

It seems to me that what behavioural economics tries to do is investigate human decision-making in light of emotional and cognitive biases. It then goes on to suggest ways to exploit or work around those biases to achieve desirable policy outcomes.

Conventional economic theory (that's a dangerous phrase, but stay with me) suggests that, with perfect information, actors will make rational decisions. Of course, economists accept that perfect information is rarely present in the real world, and information asymmetry is an important restriction on the efficient functioning of markets.

What behavioural economics goes on to say is that, even if there is perfect information or something close to it, these emotional and cognitive biases will still prevent rational decision-making.

The classic example is food. There is solid and widely available evidence that excessive calorie intake leads to obesity, which leads to poor health and even premature death. We all know this, and yet we routinely make bad decisions about the foods we eat. Why? Because will power is a finite resource, because we're bad at assessing risk, and because we sometimes favour short-term satisfaction over long-term happiness.

These are all biases that overwhelm us even though we know we're doing the wrong thing. Changing the layout of a cafeteria or even changing the size of bowls and plates are examples of how behavioural economics can be used to overcome such biases.

One of the most important criticisms I have seen of the field is that it deals almost exclusively with the small stuff such diet or getting men to pee more accurately at public urinals. But if you look at a book like Nudge, you will also see some serious proposals for reform of the US retirement pension system, the environment, and education, all based on behavioural economics principles. And in 2010 one foolhardy analyst even made an attempt to apply behavioural economics to arms control diplomacy.

Image courtesy of This is Why You're Fat.

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