Behavioural Economics

Behavioural Economics

Introduction

Behavioural economics deals with the number of approaches that go on to understand the behaviour of the consumers in a more accurate manner as compared to the predictions linked with the traditional economic theory. The basis of the traditional economics is the assumption that people tend to act in a completely instrumental, rational and a self interested way. It is assumed that people usually take full account of the information that they have and then they act according to their preferences and the information that is available to them. When they do this, it is assumed that their goal is to fully maximize their utility. The standard economic models have these assumptions.

Discussion

The consumer policies in the United Kingdom, in the recent years are also predicated on this concept of a rational consumer. The working hypothesis is that since the customers get as much information as is possible and efforts are also being made to make better their financial capabilities, then the customers should also make better suitable and informed choices in the financial service markets.

But it is also getting very obvious now that the information processing and rational models do not really give us accurate explanations regarding the observed and actual consumer behaviours. There is an increasing number of evidence regarding the consistent and persistent violations of the concept of rationality. There are a number of reasons as to why these violations occur, which include faulty reasoning done by the customers, the mental efforts that are required to make informed decisions and the complications regarding the process of decision making.

The traditional economists would go on to define such observed behaviour as irrational and regard these actions as anomalies. But since this behaviour is consistently observed and the evidence regarding this is very forceful, the departures from what the economists regard as rational are required to be explained and recognised instead of discounting or ignoring them as just some aberrations. These alternative models regarding the consumer behaviour are required to be accounted for by the policy makers of the financial services and the firms who would like to influence the choice of consumers in the financial service markets.

This is the reason that there is a growing interest in the subject regarding behavioural economics. Behavioural economics goes on to explain these anomalities through the reference of psychological insights.

Economists are of the view that we can not just study the behaviour of humans as a black box. This means that we can not only show concern regarding the outcomes predicted by the economic models and simply ignore the process of behaviour. We are supposed to open the box and study the cognitive processes that compel the behaviours of the humans. The main goal of behavioural economics is to very systematically include the psychological insights so that economic theory can be improved and thus, human behaviour can be explained in a better manner.

To do this, the systematic biases, framing effects, anomalies and the typical short cuts that consumers opt for to make decisions ...