Ever ate a huge piece of brownie, even after you were full, just because you paid for it? Ever bought a pair of jeans, just because they were on sale, and now they just lie in the back of your closet? Ever felt bad about not being able to use a coupon, despite winning it? Well, if you are, congratulations, you are behaving like a human.
This behaviour, its analysis and how we manage to think in this way, is what Behavioural Economics studies today. Psychology was always a part of economics, but in a really subtle way. Thaler and some others explicitly brought insights from psychology, and incorporated that in the wide range of economic activities, which otherwise seem irrational.
It helps explain the volatile human mind, to provide a better and deeper understanding of human decision making, and utility maximising capability. Behavioral Economics is a happy marriage of psychology and economics.
However, human beings are not always rational. This automatically proves Homo Economicus (the rational straw man) wrong. Psychologists like Amos Tversky, Daniel Kahneman, Herbert Simon and economists like Richard Thaler, Vernon Smith, Charlie Plott, all helped shape the field of behavioural and experimental economics, and helped prove the above statement right.
With Daniel Kahneman and Vernon Smith winning the Nobel jointly in 2002, Alvin Roth in 2012, Robert Shiller in 2013 and Richard Thaler, winning it now, in 2017, for outstanding work on bridging gaps between economics and psychology, the spotlight has now come on this field, more than ever. Its importance is being realised, and rightfully so.
This is a must-seize opportunity to talk about Thaler’s brilliant work showcased in his books, each slightly different, though all preaching the same thought.
Misbehaving, written as recently as 2015, acts as Thaler’s memoir, his path-breaking journey, and adventures in discovering this field and finding solace in it.
The Winner’s Curse is an interesting read, a unique layout, where each chapter starts with a question, one which urges you to process, to think. It then proceeds to solve such dilemmas, through the findings of experiments of both economics and psychology.
Nudge is a stellar piece of work, co-authored with Cass Sunstein. Unlike The Winner’s Curse, despite laying out really important solutions, the authors do so in a very light hearted way.
Areas where the theory of Nudge proves to be useful range from individual and firm decision making, financial decisions, cost effectiveness and public policy decisions. This is because, Nudge successfully shows that it is possible to help people make the right decisions, if apt choices are laid in front of them.
One of the earliest countries to adopt this technique in its policy making was the United Kingdom, when David Cameron, the former Prime Minister, decided to set up the Nudge Unit (i.e. Behavioral Insights Team). Eventually, France, US, Denmark, Singapore and other countries followed step. It is the right time for India too now, to take a step ahead and derive benefit from using this principle.
This article has been written by Yashika Doshi an aspiring Economist and a student at Meghnad Desai Academy of Economics class 2018!