Behavioral Science Series No. 3: What is Behavioral Economics?

It all started back to when psychologist Daniel Kahneman and his colleague Amos Tversky began discussing, with their fellow economist Richard Thaler, their respective models of human decision making: they realized that a lot of existing models of human decision making were based on faulty assumptions as to the motivations and drivers of human behavior. Essentially, these models assumed that humans are completely rational and make rational decisions. But we know from psychology that this is absolutely not the case. What emerges from these conversations is Behavioral Economics. And in fact, the psychologist Daniel Kahneman and Amos Trevaskis won the Nobel Prize in Economics for Prospect Theory, which incorporates knowledge about human behavior from psychology into decision-making models.

The power of Behavioral Economics, and why it has since gone mainstream, is that it applies to a vast array of different fields.

  • For those of you who have watched TED talks, you know that the topic of a TED talk can be anything under the sun, but three of the top 20 TED talks are, in fact, about behavioral economics.
  • If you were to do an Amazon search on titles related to behavioral economics, it returns almost 9000 results.
  • We have also seen at least seven countries in the world who have included behavioral economics or behavioral insights departments that inform policy and help promote responsible citizenship.
  • Rory Sutherland, Ogilvy Group said "The next revolution is psychological and not technological"

The power of Behavioral Economics really lies in the fact that once we truly understand how and why people are making decisions, then we will have the ability to impact that decision-making process.

To learn more about how to use Behavioral Economic models, click here.

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