Behavioral Economics
The Basic Idea
Economics is concerned with production, consumption, and wealth, all of which involve human behavior. However, not all economic ideologies base their predictions on the same ideologies. Two popular and opposing branches are traditional economics and behavioral economics. Traditional economics makes calculations on human behavior based on the idea that humans are rational beings that are reasonably successful at deciding what they value and acting to maximize it. Behavioral economics, on the other hand, combines psychology with economics in order to try and better understand how humans actually act instead of how they should act. This means taking into account factors like emotions, beliefs, cultural influences and cognitive biases, all of which cause humans to deviate from straightforward rationality.2
Imagine that you are deciding what kind of laptop to purchase. According to traditional economics, the only thing that would be considered in this purchasing decision would be utility. Which laptop is the best in order to maximize utility? What laptop is the best value for its money?
However, behavioral economics would allow room for other influences, such as emotions, or bounded rationality. What laptop is considered cool? How much time did you have to make the decision?
The second set of questions represents the kind of factors that behavioral economics takes into account, which might not be rational influences, but impact decision-making all the same. Once behavioral economics has been able to understand the different kinds of influences that really impact human behavior, it also can demonstrate how human behavior can be shaped through the use of heuristics and biases. Instead of expecting humans to behave rationally, we can understand how biases influence their decisions. Policy makers, governments and businesses can use behavioral economics to their advantage to try and push people towards making the best decisions possible.
Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?
– Dan Ariely, an Israeli-American author, in his book Predictably Irrational: The Hidden Forces That Shape Our Decisions
About the Authors
Dan Pilat
Dan is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. Dan has a background in organizational decision making, with a BComm in Decision & Information Systems from McGill University. He has worked on enterprise-level behavioral architecture at TD Securities and BMO Capital Markets, where he advised management on the implementation of systems processing billions of dollars per week. Driven by an appetite for the latest in technology, Dan created a course on business intelligence and lectured at McGill University, and has applied behavioral science to topics such as augmented and virtual reality.
Dr. Sekoul Krastev
Dr. Sekoul Krastev is a decision scientist and Co-Founder of The Decision Lab, one of the world's leading behavioral science consultancies. His team works with large organizations—Fortune 500 companies, governments, foundations and supernationals—to apply behavioral science and decision theory for social good. He holds a PhD in neuroscience from McGill University and is currently a visiting scholar at NYU. His work has been featured in academic journals as well as in The New York Times, Forbes, and Bloomberg. He is also the author of Intention (Wiley, 2024), a bestselling book on the science of human agency. Before founding The Decision Lab, he worked at the Boston Consulting Group and Google.
