Behavioral economics solely gathers information concerning decision-making processes for real-life situations by the use of psychology and economics. On the other hand, traditional economics relies on the fact that people always make the best possible choices for every decision they make. In contrast to that, behavioral economics acknowledges the fact that feelings, biases, routines, and habits tend to influence decisions that they make. On a daily basis, people make decisions on shaping their routines, such as diet and finances, and behavioral economics drives the decision-making. People do not make decisions that can be considered economically sound, and from a logically economical point of view, their reasoning and the rationale behind it make sense once we factor in the many subtle influences such as the environment, personal habits, and marketing.
The Importance of Emotions in Making Decisions
One of the most notable discoveries of behavioral economics is how deeply people’s emotions impact their decisions. Unlike traditional economics, which is based on the availability of rational thought, in practical terms, decisions are made based on an emotion like happiness, fear, excitement, or perhaps even the emotion of sadness. The case could be made of an individual buying expensive things when working, not because he/she needs them, but because he/she is able to relax while shopping. Some advertisers spend heavily on emotion marketing, effectively making people nostalgic, joyous, or even secure the moment they come in contact with the product. Rational thought is overridden by emotion in such cases, which results in consumers behaving irrationally, like shopping beyond their means or purchasing goods they seldom use.
The Power of Defaults and Inertia
The influence of behavioral economic defaults is another example of inertia. People are much less likely to expend effort making a choice and usually stick with the default option. Privacy settings are a good example of this; during the sign-up process for a new online service, most users just click accept instead of customizing the settings. The same pattern is found in retirement savings programs—the defaults greatly affect users. Employees are much more likely to participate in a retirement savings program in which they are enrolled by default, even though they have the option to decline. This inertia suggests that the presentation of options, even when all choices are available, greatly impacts the active decision made.
The Impact of Framing on the Consumer Decision-Making Process
The presented information, framing, has a large impact on making a decision. A labeled product, “90% fat-free,” sounds more appealing than “10% fat,” even though both statements share the same meaning. Furthermore, in marketing, people will act with greater willingness if the decision is presented in terms of gains compared to loss. Customers are likely to buy a product on offer if informed “you are saving $20,” as opposed to “you are avoiding a $20 loss.” The framing effect demonstrates that consumer behavior can be influenced greatly with even the slightest adjustments to presentation or wording, regardless of the actual value.
The Impact of Social Influence on Spending Choices
Social influence is especially effective in the field of behavioral economics. Individuals tend to make a decision based on the actions of those around them due to social proof. Individuals are likely to purchase from or visit the same place as their workmates due to the influence of their social circle. Online reviews, social media, and even the likes of influencers and public figures fuel this bias by advertising a product and service, claiming they are popular and can be trusted. This is the reason why, even if the product is just as ordinary as the many others available on the market, the ability to achieve massive sales due to viral trends is astonishing.
Impact of Anchoring on the Spending Behavior of Customers
Anchoring influences the behavioral economics of consuming. It relates to the tendency of using the first piece of information provided to make the decision. For instance, a shirt may retail for $200, but if it is marked down to $100, consumers will feel it is a bargain. This may happen even when the true value of a shirt is far less than $100. To drive sales, restaurants place highly priced menu items at the top of the menu so that other items seem cheaper. It is worth noting that consumers are influenced by the price perception due to the use of initial figures as benchmarks.
Overconfidence and Consumer Decisions
The effects of overconfidence can hinder people’s decision-making capabilities. By way of example, advertising tricks are of twofold consequence. They can either greatly influence the decision-making process, with branding and peer influence being central effects, or be easily avoided if people are less overconfident. Thus a consumer may self-brand as being way smarter than falling under peer pressure or loose branding. The persuasion overconfidence caters to during spending and advertising tricks and also relates to loose and risky spending while investing due to the confidence overconfidence effects. Trust and confidence while investing also favor overconfidence errors.
Conclusion
Behavioral economics purely shows irrational consumer decisions to be a cadence attached to emotions. Apart from the reasons of mental pressures encompassing procrastination and social pressure, people in the contemporary world’s decision-making process are highly a result of the pressures from the peers and the current online trends. Even the way in which the products are priced and placed has a great influence. Moreover, there is also a reason why people go against the principal of traditional economics and bend under the influence of behavioral economics. For the two kinds of people, being the consumers and the business owners, psychology aids in the making of reasonable decisions and addressing the “whys” of business. Businessmen, as the people analyzed psychology to the economic model of decision-making and individual behavior, which rationally benefited the consumers as a whole. By understanding smarter, stupider, and the behavioral economic model theory, the consumers became more aware of the subtle influences of the business minds and hypes crafted for people.
FAQs
1. What is behavioral economics in simple terms?
Behavioral economics examines the overlap between psychology, emotions, and decision-making in economic contexts, highlighting the irrationality behind such actions.
2. Why is behavioral economics important for consumers?
It assists users in comprehending how advertising, social pressure, and emotions impact their selections, and it raises awareness of some of their biases.
3. How do businesses use behavioral economics?
Business applies it to structure pricing, advertising, and product policies to shape purchase decisions, as in the case of discount framing or defaults.
4. Can behavioral economics help people save money?
Certainly, people can avoid making poor savings decisions by recognizing biases like loss aversion or overconfidence and adjusting their actions to save more.
5. What is an example of behavioral economics in daily life?
A widely shared example is the purchase of items simply because they are discounted or in some other way marked “on sale,” leading to the feeling of avoiding a loss.
