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Behavioral Economics

Posted on January 17th, 2013 by Jenny Frankel

Economics is not just for people who are interested in things like politics and Wall Street. The field extends into all aspects of people’s lives, and knowing how it works can help you in very real and practical ways. Behavioral economics is a good example of how the field can help people make better decisions in their day-to-day lives. Essentially, behavioral economics is the study of the way different factors affect the types of economic decisions people make. It takes emotional, social, and cognitive factors into account in an attempt to gain a better understanding of the often subconscious motivating factors behind our choices. By understanding the things that motivate us, we can avoid the behaviors we don’t like.

An example of a behavioral economics study might help here. Imagine you are asked to write down what you would be willing to pay for a random item, like a chocolate bar or some sort of computer accessory. What sort of factors do you think would go into the price you come up with? You may think that you are deciding based on rational and relevant factors, like how much you want the item, how much money you have, etc. However, a recent economics study has shown that there may be subconscious factors that go into the decisions we make which seem random and entirely irrational.

Behavioral economist Dan Ariely, along with some associates, recently did an experiment in an attempt to see what things motivate us when we determine what something is worth. First, he asked people to write down a random two digit number on a piece of paper. Then, the people being tested were told to write how much they would be willing to pay for different items, such as a chocolate bar or a piece of computer equipment. Amazingly, people who wrote higher numbers at the beginning were willing to pay more money for the items they were shown than people with lower numbers.

The test shows how ostensibly rational decisions may in fact be irrational ones (or at the very least informed by non-relevant things). Now that you are aware of this, you may think twice before paying too much for something you may not want very much.

Granted, people don’t tend to write random numbers before making a purchase. However, behavioral economics delves into all sorts of different things. If this sort of thing interests you or you want to learn about other experiments, Dan Ariely has a blog. International students who are interested in studying economics, may also want to consider looking at our guideline about where to study economics.

Written by Jenny Frankel

Jennifer is the Director of Financial Services at Envisage International. Jennifer is a graduate of the University of Florida where she holds a Masters in International Business and a Bachelors of Science in Business Administration. She has lived and worked abroad in Chile, Costa Rica and London, and traveled extensively in South America, Europe and Asia.

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