Key Lessons On Behavioural Economics: Explained Easily

Feb 06, 2023

All the purchases made by consumers are driven by the economic decision made at the end of the process. Hence, businesses need to understand the motivation and reasons behind the consumer making such a specific economic decision.
It has been learned that unlike the traditional definition of rational decision-making among consumers in economics textbooks, there are several other factors at play in this process.

For instance, lessons on behavioural economics confirm that there are psychological factors at play when consumers are making economic decisions. The study of these factors is a part of behavioural economics.

The core concepts of approaching behavioural economics:

core concepts of approaching behavioural economics

The concept of behavioural economics explains the psychological factors in the economic decision-making process. Behavioural economics states that consumers are not always rational in every economic decision being made to them and several psychological factors are at play.

As a result, economists have added a psychological element to traditional models to clearly understand the decision-making behaviour and motives of the end consumer. Unlike traditional economists, behavioural economists do not rely solely on mathematical models to predict the outcomes of consumer actions. Rather, it is based on the past behaviour of the economic decision-making process.

Several concepts like bounded rationality, limited self-control, and loss aversion are part of the behavioural economics framework. These concepts can be explained as follows:

Bounded Rationality:

The bounded rationality concept in behavioural economics states that the rationality of consumers is bound by the situation they are facing to make a decision. The consumer is expected that consider all possibilities related to the situation. However, the considered elements may still not cover all possibilities. The other family members or friends of consumers may have different rationalities.

In other words, the consumer is rational. However, rationality is not perfect and is bounded as the consumer may not have all the required information to solve the issue at hand.

Limited Self-control:

The perfect rationality theory believes that consumers have complete self-control and are rarely affected by external factors and emotions. However, behavioural economics believes that consumers may not have complete self-control. On the contrary, consumers have limited self-control which brings other psychological factors into play.

For instance, while all consumers understand that fast food is not good for health, consumers trying to lose weight may end up buying fast food even when they are aware of the consequences. It is mainly because they have limited self-control.

Loss Aversion:

Loss aversion is a phenomenon in behavioural economics under which the real or potential loss to an individual is considered more severe as compared to the equivalent gain. The overwhelming feeling o incurring a loss can nudge consumers to make some irrational choices that are not necessarily driven by logic. Holding to a stock of an organization for too long or too little time can be an example of the loss aversion phenomenon.

Similarly, there are other behavioural economic concepts like biases, mental fatigue, situational framing, and social preferences that need to be considered for an in-depth understanding of the subject.

What do you learn in behavioural economics?

Behavioural economics is an intersection between economics and psychology. It aims to understand the psychological factors that drive the economic decision-making process for an individual. With a better understanding of how psychology affects the economic process, businesses can drive expected changes in consumer behaviour by triggering those elements.

Behavioural economics essentially teaches the factors with which consumers make rational economic choices. The understanding of behavioural economics is particularly useful for individual organizations, governments, and consumers in general.

Why do you learn behavioural economics?

The key reason behind learning behavioural economics is to get a better understanding of consumer behaviour. An in-depth understanding of behavioural economics can help you understand the nudges and triggers that can be helpful for a business to drive sales and deliver a superior customer experience consistently.

At the same time, behavioural economics can help governments understand the factors important for consumers and build policies and frameworks to take care of those factors. The understanding of behavioural economics is mainly important to identify the factors that play an important role in the decision-making process of the consumer.

Where can I study behavioural economics?

Several online resources can help you get started on the journey of learning behavioural economics. Once you have a basic understanding of the various behavioural economics concepts, you can opt for a private economics tutor who can provide an in-depth understanding.

For instance, if you are looking for an economics tutor in Kitchener, you can go to a platform like LearnPick and specify your region and requirements to help find the best tutors available in your area. Or when a gambler cannot stop gambling when he/she is winning or losing. It is similar to why people cannot start exercising even when they know it is good for their health is mainly because of the psychological elements that play a role.

Conclusion:

Behavioural economics examples can be noticed in almost all aspects of your daily life. It is important to have clarity about these concepts so that you can take note of them and use them in your business for growth.

LearnPick can help you identify the best economics tutor to accelerate your learning. So, get in touch with LearnPick today!

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