Overview of Behavioral Economics

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Behavioural economics is the study of the effects that psychology has on the decision making of the economy. This tends to be the way that people think and feel when they are spending money on a certain good or service. The great economist Adam Smith was the first follower of this idea through his book “The theory of moral sentiments” which dates back to 1759. However, it took over 100 years to get a more clarified meaning of how big of a role the psychology of a buyer plays in economics. In behavioural economics there are seven basic principles which all contribute to the decision making process. Behavioural economics can explain how people will react to different situations such as times when there are no economic problems and times when there is an economic adversity either within the society or at home. In this context, the emotional decision should be taken more seriously when trying to consider different economic flows.

Consumer behaviour, which is a part of behavioural economics and of course an important part of buyer behaviour, is the study of the six w’s which are who, what, when, why, where and how. It incorporates features from psychology, marketing and economics. Consumer behaviour tries to understand the buyer decision-making process and how demographics, influences from family and friends and behavioural changes can change the buyer’s decision on a certain good or service.

Firstly, heuristic applies to experience based techniques that are used for problem solving, discovery and of course learning. Heuristic methods are used to speed up the procedure of finding an acceptable answer; one of the most well known heuristics is “the rule of thumb.” This means that the decisions of most people are based on how easy the ...

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.../arstechnica.com/science/news/2010/10/envy-stimulates-the-economyand-is-why-you-bought-your-iphone.ars [Accessed 3rd December 2011]

• Plous, S., (1993). The psychology of judgment and decision-making.

• Poundstone, W., March 19, 2010, “The hidden psychology of menu design.” Wired.co.uk [Online] available from: http://www.wired.co.uk/magazine/archive/2010/04/start/the-hidden-psychology-of-menu-design [Accessed 2nd December 2011]

• Tversky, A., Kahneman, D. (1981). "The Framing of decisions and the psychology of choice". Science 211 (4481): 453–458

• Welch, N., February, 2010, “A marketer’s guide to behavioural economics.” McKinsey Quarterly [Online] available from:

http://www.mckinseyquarterly.com/A_marketers_guide_to_behavioral_economics_2536 [Accessed 3rd December 2011]

• Wilkinson, N (2010), Introduction to Behavioral Economics, Basingstoke: Palgrave-MacMillan

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