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WHAT IS BEHAVIORAL ECONOMICS?

Why does it matter to us?

The Basic Idea
Traditional economic theory has long operated on the assumption that rational self-interest drives most, if not all, human behavior. Meanwhile, mainstream psychology has historically viewed intangible, intra-psychic forces as the primary ‘drivers’ of human behavior. However, our economy’s recent near-collapse has challenged the credibility of both orthodoxies. At the same time, research in the fields of biology, neurology, and social psychology have stirred the mix by identifying biological bases of behavior, reinforcing our growing awareness that people are neither entirely independent, nor particularly rational, decision-makers.

By contrast, behavioral economics (also known as economic psychology¹) maintains, based on empirical research, that economic behavior is a subset of human behavior. As such, it is neither purely rational nor entirely a product of one’s inner psyche. Rather, while there are few sole causes, human behavior is clearly characterized by visible patterns and governed by identifiable principles. These forces are not chaotic or incoherent, but they are certainly a-rational.²

The Field of Behavioral Economics
As an emerging specialization, most of those working in the field are academics, not practitioners. Thus, we find that the number of practicing behavioral economists can be counted on the fingers of one hand.

Since there are so few of us, there is no standard ‘cookbook’ for putting behavioral economics into practice. However, as someone whose work involves studying and facilitating change, my approach involves three core elements that span both academic and clinical dimensions. These are:

Research, preferably quantitative and qualitative;
Helping clients to develop approaches to change in ways that fit with who they are, yet are capable of stimulating positive – even transformational – change;
Conducting outcome measurement, to learn what works, what does not, and why? This last piece is essential since it allows clients to incorporate this learning into future endeavors. Interestingly, the outcome data we have collected show that skilled, consistent application of this approach yields positive and lasting results.

Below, we present some illustrative examples, to show how BE could be helpful in reframing common business problems. We emphasize, however, that all our work is tailored to client concerns, which may be different than those described below.

Law identified by BE	Status quo bias
Definition	People prefer the status quo, even if it is unpleasant, over the unknown.
How it may ‘show up’ for your company.	Many changes promise clear benefits but lack of familiarity causes a backlash.
Sample solution(s)	Use familiar language; offer a taste beforehand (also known as ‘stress inoculation.’) By minimizing resistance to a “not-us” behaviors and allowing rehearsal, change is facilitated.
Law identified by BE	Money fallacy
Definition	People tend to think of money as if it had fixed value, not in terms of what it will buy.
How it may ‘show up’ for you	Even though a program is underpriced for its value, customers may object to any increase.
Sample solution(s)	Re-frame the cost in small, incremental units to contain sticker shock. “For the cost of one fast food lunch per week you could gain these powerful protections for your loved ones.”

¹ Daniel Kahneman, and Amos Tversky, two Princeton psychologists won the 2002 Nobel Prize for Economics, bringing Behavioral Economics into the public eye for the first time. However, unraveling economic behavior has long been a subject of great interest for many social scientists.

² Definition: not within the domain of what can be understood or analyzed by reason; outside the competence of the rules of reason.