25/03/2022, 10:32 What is behavioural economics?

| Nobel economics prize | The Guardian

Nobel economics prize

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What is behavioural economics?

After US academic Richard Thaler wins Nobel prize in economics
for pioneering work, we take a closer look at his field
Richard Thaler wins Nobel prize in economics

Richard Partington
@RJPartington
Mon 9 Oct 2017 17.43 BST

Behavioural economics incorporates the study of psychology into the analysis of the
decision-making behind an economic outcome, such as the factors leading up to a
consumer buying one product instead of another.

The US academic Richard Thaler won the Nobel prize in economics on Monday for his
pioneering work in this field. The Royal Swedish Academy of Sciences, which awarded
the £845,000 prize, praised Thaler for incorporating psychological assumptions into
analyses of economic decision-making.

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25/03/2022, 10:32 What is behavioural economics? | Nobel economics prize | The Guardian

Unlike the field of classical economics, in which decision-making is entirely based on

cold-headed logic, behavioural economics allows for irrational behaviour and attempts
to understand why this may be the case. The concept can be applied in miniature to
individual situations, or more broadly to encompass the wider actions of a society or
trends in financial markets.

Brexit is one example of how behavioural economics can be useful. Thaler has
suggested that the theory can help explain how the narrow vote to leave the EU was
influenced by gut choices, as opposed to rational decision-making.

The theory is particularly useful for companies and marketers looking to increase sales
by encouraging changes in behaviour by consumers. It can also be used for the
purposes of setting public policy.

Thaler is particularly well known for his work on “nudge theory”, a term he coined to
help explain how small interventions can encourage individuals to make different
decisions. Nudges can, however, be manipulative, to the detriment of individuals.

Here are some examples of nudge theory:

Supermarkets
Thaler suggests changes can be made to an individual’s “choice environment” to
influence their behaviour. The best example of this comes in the supermarket, where
attention can be drawn to certain products to encourage consumers to spend money.

Organ donation
Thaler has examined the use of inertia and the power of default arrangements in
permissions for organ donation.

Theresa May is considering a system of presumed consent – which would mean

individuals are presumed to agree to the use of body parts after death unless they opt
out – in a policy that was central to her speech at the Conservative party conference in
Manchester last week.

Tax reminders
The Whitehall nudge unit helped to rewrite tax reminder letters using principles of
behavioural economics, which it said helped to bring forward more than £200m for the
government in one year.

E-cigarettes
The behavioural insights team worked with Department of Health on the regulatory
framework for e-cigarettes, viewing the devices as potentially beneficial in helping
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25/03/2022, 10:32 What is behavioural economics? | Nobel economics prize | The Guardian

smokers to quit. It advised the government that it is much easier to substitute a similar
behaviour than to eliminate an entrenched one. More than 2.3 million people are now
vaping.

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