Behavioural Economics

A standard definition of Economics could describe it as a Social Science directed at the satisfaction of needs and wants through the allocation of scarce resources which have alternative uses. In simpler terms, it is a social science which is the scientific study of human society and social relationships. Studying human society essentially means studying human behaviour and here is where Behavioural Economics comes into picture.

Behavioural Economics can be explained as a method of Economic Analysis that applies psychological insights into human behaviour to explain economic decision making.

Economic psychology emerged in the twentieth century in the works of Gabriel Trade, George Kateona and Laszlo Garaie. In fact the concept of expected utility and discounted utility models began to gain importance during this period.

Richard Thaler, the Father of Behavioural Economics won the 2017 Nobel Economics prize for his contributions in the field of Behavioural Economics.

The concept of 'Nudging’ is introduced in today’s world, which proposes positive reinforcement and indirect suggestions as ways to influence the behaviour and decision making of groups and individuals. Nudge theory in India can be experienced in the Swacch Bharat campaign drive by the government, as it helped people understand the ill-effects of unclean surroundings by nudging. Lack of knowledge or poor incentives lead us to select sub optimal choices, by offering insights into how humans think and act. The Nudge theory can be used to drive unfavourable ones without resorting to drastic interventions. Several nudge units exist around the world at the national level in countries like UK, Germany, as well as at the international level (World bank, UN, etc.)

Development economists and policy makers in third world countries use nudging and social psychology to understand and solve the most aggravating problems plaguing their countries.

There exists a fine line between social psychology and behavioural economics. Behavioural economists asks questions mostly about the way people make economic decisions but social psychologists are willing to consider other, non-fiscal personal choices as well.

Also, career options in Behavioural Economics are increasing. Government employees need behavioural economists to guide them regarding economic policies. Private sector seeks their help to find better ways to market their products. In academics as well it is a booming field for research and analysis.

Let’s explore the world of Behavioural Economics.

Vandana Pareek

SYBA