The Rise of Behavioral Economics and Its Influence on Organizations
Buy Softcover. FAQ Policy. About this book Economics has paid little attention to the psychology of economic behaviour, leading to somewhat simplistic assumptions about human nature. Show all. Table of contents 11 chapters Table of contents 11 chapters Introduction Pages Agarwal, Bina et al.
The less-is-better effect suggests a preference reversal when objects are considered together instead of separately. One study presented participants with two dinner set options. Option A included The effect of licencing has been studied for different behavioral outcomes, including donations, cooperation, racial discrimination, and cheating Blanken et al.
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It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. People are more willing to take risks or behave dishonestly; e. Mental accounting Mental accounting is a concept associated with the work of Richard Thaler see Thaler, , for a summary. According to Thaler, people think of value in relative rather than absolute terms. In addition, Mindless eating The expression "mindless eating" has been coined by the eating behavior expert Brian Wansink. It refers to the finding that various cues associated with food non-consciously affect the amount and quality of people's consumption.
Cues often serve as benchmarks in the environment. Cues may include serving containers, packaging, people, labels and atmospheric factors. They suggest Myopic loss aversion Myopic loss aversion occurs when investors take a view of their investments that is strongly focused on the short term, leading them to react too negatively to recent losses, which may be at the expense of long-term benefits Thaler et al.
This phenomenon is influenced by narrow framing, which is the result of investors Naive allocation Decision researchers have found that people prefer to spread limited resources evenly across a set of possibilities. This can be referred as naive allocation. For example, consumers may invest equal amounts of money across different investment options. Similarly, the diversification bias shows that consumers like to spread out consumption choices across a variety of goods Nudge According to Thaler and Sunstein , p.
To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Optimism bias People tend to overestimate the probability of positive events and underestimate the probability of negative events happening to them in the future Sharot, For example, we may underestimate our risk of getting cancer and overestimate our future success on the job market.
A number of factors can explain unrealistic optimism, including perceived control and It is frequently measured by having experimental participants answer general knowledge test questions. They are then asked to rate how confident they are in their answers on a scale.
Overconfidence is Overjustification effect This effect occurs when a person's intrinsic interest in a previously unrewarded activity is decreased as a result of engaging in that activity as a means to an extrinsic goal e. Deci, E.
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A meta-analytic review of experiments examining the Pain of paying People don't like to spend money. We experience pain of paying Zellermayer, , because we are loss averse. This pain is thought to be reduced in credit card purchases, because plastic is less tangible than Partitioning The rate of consumption can be decreased by physically partitioning resources into smaller units, for example cookies wrapped individually or money divided into several envelopes.
When a resource is divided into smaller units e.
In addition to the Peak-end rule According to the peak-end rule, our memory of past experience pleasant or unpleasant does not correspond to an average level of positive or negative feelings but to the most extreme point and the end of the episode Kahneman, b. The rule developed from the finding that evaluations of a past episode seem to be determined Precommitment Humans need a continuous and consistent self-image Cialdini, In an effort to align future behavior, being consistent is best achieved by making a commitment.
Thus, precommitting to a goal is one of the most frequently applied behavioral devices to achieve positive change. Committing to a specific future action e. Preference In economics, preferences are evident in theoretically optimal choices or real behavioral choices when people decide between alternatives.
Preferences also imply an ordering of different options in terms of expected levels of happiness, gratification, utility, etc.
Rational Decision Making (Behavioural Economics)
Arrow, Preferences are sometimes elicited in survey research, which may be associated with a range of problems, such Preference reversals contradict the predictions of rational choice. Lichtenstein, S. Priming Conceptual Conceptual priming is a technique and process applied in psychology that engages people in a task or exposes them to stimuli.
The prime consists of meanings e. For example, one study Myopic Procrastination People often put off decisions, which may be due to self-control problems leading to present bias , inertia, or the complexity of decision making see choice overload. Various nudge tools, such as precommitment, can be used to help individuals overcome procrastination.
Choice architects can also help by providing a limited time window for action see scarcity Both transient preferences in the short-term e. For example, people may overestimate the positive impact Prospect theory Prospect theory is a behavioral model that shows how people decide between alternatives that involve risk and uncertainty e.
It demonstrates that people think in terms of expected utility relative to a reference point e. Prospect theory was developed by framing risky choices Ratio bias The concept of ratio bias is rooted in our difficulties in dealing with proportions or ratios as opposed to absolute numbers. For example, when asked to evaluate two movie rental plans with a contracted scale e. It is usually positive e. Reciprocity is an interesting concept from the perspective of behavioral economics, because it does Recognition heuristic While a core heuristic in the heuristics and biases tradition of Tversky and Kahneman is availability a similar heuristic proposed in Gigerenzer's fast and frugal tradition is recognition.
Reference dependence Reference dependence is one of the fundamental principles of prospect theory and behavioral economics more generally. Reference dependence can apply to any decision involving risk and uncertainty. Regret aversion When people fear that their decision will turn out to be wrong in hindsight, they exhibit regret aversion. Regret-averse people may fear the consequences of both errors of omission e. The effect of anticipated regret is particularly Regulatory focus theory The psychological theory of regulatory focus Florack et al.
The former involves the pursuit of goals that are achievement- or advancement-related, characterized by eagerness, whereas the latter Representativeness heuristic Representativeness is one of the major general purpose heuristics, along with availability and affect.
It is used when we judge the probability that an object or event A belongs to class B by looking at the degree to which A resembles B. When we do this, we neglect information about the general probability of B The risk-as-feelings hypothesis Loewenstein et al. Satisficing According to Herbert Simon, people tend to make decisions by satisficing a combination of sufficing and satisfying rather than optimizing Simon, Decisions are often simply good enough in light of the costs and constraints involved.
As a heuristic, satisficing individuals will choose options that meet basic decision criteria. A focus on satisficing can be Scarcity heuristic When an object or resource is less readily available e. Scarcity appeals are often used in marketing to induce purchases. Marketing messages with limited quantity appeals are thought to be more effective than limited time appeals, because they create The scarcity mindset entails a feeling of not having enough of something.
According to Mullainathan and Sharif, anyone can experience cognitive scarcity, but it is particularly Self-control Self-control, in psychology, is a cognitive process that serves to restrain certain behaviors and emotions vis-a-vis temptations and impulses. This aspect of self-regulation allows individuals to achieve goals Diamond, See also intertemporal choice, present bias, dual-self model, dual-system theory, ego depletion, and decision fatigue. Diamond, A. Executive functions. Annual Review of Psychology,. Social norm Social norms signal appropriate behavior and are classed as behavioral expectations or rules within a group of people Dolan et al.
Social norms of exchange, such as reciprocity, are different from market exchange norms Ariely, Normative feedback e. Social preferences Social preferences e.
Fehr, E. Why social preferences matter: The impact of non-selfish motives on competition, cooperation and incentives. The Economic Journal, , C1-C Social proof The influence exerted by others on our behavior can be expressed as being either normative or informational.
Normative influence implies conformity in order to be accepted or liked Aronson et al. This may happen even when only small transition costs are involved and the importance of the decision is great. Field data from university health For example, individuals sometimes order Take-the-best heuristic Take-the-best is a simple decision-making shortcut that people may apply when choosing between alternatives.
Using the take-the-best heuristic, a decision maker will base the choice on one attribute Time temporal discounting Time discounting research investigates differences in the relative valuation placed on rewards usually money or goods at different points in time by comparing its valuation at an earlier date with one for a later date Frederick et al. Evidence shows that present rewards are weighted more heavily than future ones. Once rewards are very Trust Trust pervades human societies. It is indispensable in friendships, love, family, organizations and politics.
Interpersonal trust is a mental construct with implications for social functioning and economic behavior as studied by trust games, for example.
Related Psychology, Rationality and Economic Behaviour: Challenging Standard Assumptions
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