Behavioral Economics – SAGE Business Researcher

Will a better understanding of behavior improve economic models?

Executive Summary

No longer a fledgling challenge to traditional theories, behavioral economics is a growing field of study incorporating how human psychology affects economic decisions. Economists have long held that humans are perfectly rational actors who know how to maximize their own happiness. Supporters of behavioral economics say this is simplistic, and that humans are anything but rational. They argue that a greater understanding of human motivations and incentives can improve economic models and spur better policy in government and business. Behavioral economics, they say, can influence everything from what people eat for lunch to how much they save for retirement to how companies engage with their customers. But critics respond that behaviorial economics has limitations and that efforts to influence behavior, sometimes known as nudges, aren’t as powerful as the field’s cheerleaders hope. Among the questions under debate: Will behavioral economics replace traditional economics? Should business or government “nudge” people toward certain behaviors? Can behavioral economics make managers and firms more effective?

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Resources

Bibliography

Books

Akerlof, George A., and Robert J. Shiller, “Phishing for Phools: The Economics of Manipulation and Deception,” Princeton University Press, 2015. Two prominent economists argue that economics has failed to incorporate how deception and trickery influence markets.

Kahneman, Daniel, “Thinking, Fast and Slow,” Farrar, Straus and Giroux, 2011. This book sums up much of the groundbreaking work by psychologist Kahneman and his research partner Amos Tversky on judgment and decision-making, including applications for economics.

Mullainathan, Sendhil, and Eldar Shafir, “Scarcity: Why Having Too Little Means So Much,” Picador, 2013. A look at the behavioral economics of poverty and development by two researchers at Harvard and Princeton, respectively.

Nease, Bob, “The Power of Fifty Bits: The New Science of Turning Good Intentions Into Positive Results,” HarperCollins, 2016. The former chief scientist at Express Scripts, a pharmacy benefits manager, explains how corporations and others in the business world can apply behavioral strategies to business.

Thaler, Richard H., “Misbehaving: The Making of Behavioral Economics,” W.W. Norton & Co., 2015. One of the first behavioral economists traces the history of the field and his contributions to it.

Thaler, Richard H., and Cass R. Sunstein, “Nudge: Improving Decisions About Health, Wealth, and Happiness,” Penguin Books, 2008. A classic in the literature, this book argues that policymakers and business leaders should use “choice architecture” to better design everything from cafeteria lines to retirement savings plans to help consumers make better decisions.

Articles

Ariely, Dan, “The End of Rational Economics,” Harvard Business Review, July–August 2009, http://tinyurl.com/h69mryb. A leading researcher in behavioral economics argues that the 2007–09 financial crisis should mark the end of trust in classical economic theory and reviews studies about why people cheat.

Berman, Kristen, “How Startups Should Use Behavioral Economics,” Tech Crunch, Dec. 7, 2015, http://tinyurl.com/nq28tsh. A behavioral economist argues that startups and designers should integrate behavioral insights into their processes.

Harford, Tim, “Behavioural Economics and Public Policy,” Financial Times, March 21, 2014, http://tinyurl.com/jctrmyf. Article examines some current fights over the relevance of behavioral economics and its future.

Lambert, Craig, “The Marketplace of Perceptions,” Harvard Magazine, March–April 2006, http://tinyurl.com/zjospet. The deputy editor of Harvard Magazine comprehensively reviews the rise of behavioral economics.

Lowenstein, George, and Peter Ubel, “Economics Behaving Badly,” The New York Times, July 15, 2010, http://tinyurl.com/23bn2ru. Two leading researchers in the field criticize the belief that behavioral economics is a silver bullet.

Porter, Eduardo, “Nudges Aren’t Enough for Problems Like Retirement Savings,” The New York Times, Feb. 23, 2016, http://tinyurl.com/htk2ajs. Article explores why behavioral economics interventions sometimes fall short.

Thaler, Richard H., and Sendhil Mullainathan, “How Behavioral Economics Differs from Traditional Economics,” The Concise Encyclopedia of Economics, http://tinyurl.com/6l36hpy. Two economists provide an overview of behavioral economics and its history.

Reports and Studies

“2015 Annual Report,” White House Social and Behavioral Sciences Team, http://tinyurl.com/zuxhxcg. An annual report reviews the White House team’s first year of studies, including test results from a variety of interventions.

Beshears, John, Patrick Rooney and Jenny Sanford, “Express Scripts: Promoting Prescription Drug Home Delivery (A) and (B),” Harvard Business School Case 916-026, February 2016, http://tinyurl.com/zntucqj. A case study examines Bob Nease’s decision to change the default option for home delivery of certain prescriptions during his time as chief scientist at Express Scripts.

Samson, Alain, ed., “The Behavioral Economics Guide 2015,” http://tinyurl.com/nulvsm3. This guide provides an overview of behavioral economics literature as well as essays from top practitioners on a host of related topics. It also includes an extensive glossary of relevant terms.

The Next Step

Company Strategy

Dholakia, Utpal M., “Why Nudging Your Customers Can Backfire,” Harvard Business Review, April 15, 2016, http://tinyurl.com/jan6kgv. Some sellers have successfully steered customers to buy certain products by using nudge marketing, although others have failed because some consumers see such efforts as condescending, says a marketing professor at Rice University’s graduate business school.

Ember, Sydney, “Life Insurance Tries to Lighten Up,” The New York Times, March 25, 2016, http://tinyurl.com/jxphxgx. Several life insurance companies have undertaken advertising campaigns with positive messaging to fight consumers’ negative impressions linking their products to mortality.

Whitman, Elizabeth, “The ‘Natural’ Food Label Is A Lie, And Most Customers Have No Idea,” International Business Times, Jan. 27, 2016, http://tinyurl.com/h53e877. More food companies are labeling products as “natural” because the U.S. Food and Drug Administration does not define the term and consumers are more likely to buy such labeled products, according to the director of food safety for Consumer Reports.

Finance

Belsky, Gary, “Why We Think We’re Better Investors Than We Are,” The New York Times, March 25, 2016, http://tinyurl.com/hxkmoga. Overconfidence and biases toward optimism and belief in one’s ability to outperform past investments, among other factors, lead amateur investors to continue making risky decisions, says an author who writes about decision-making and consumer behavior.

Singal, Jesse, “Don’t Let Your Brain Throw Away All of Your Money,” New York Magazine, Jan. 27, 2016, http://tinyurl.com/zpsbh3f. Ordinary investors should put money in index funds and other low-risk investments, but many forgo these for high-risk options and are then unwilling to sell poorly performing stocks for fear of losing money, says a social sciences professor at the University of Chicago.

Wang, Penelope, “How a Bowl of Cashews Changed the Way You Save for Retirement,” Time, May 11, 2015, http://tinyurl.com/hff5k7e. Many people overestimate their self-control for spending and save less than they should, but employers can help them save more by automatically enrolling them in retirement plans, says a behavioral finance professor at the University of Chicago’s Booth School of Business.

Government Policies

Bunch, Joey, “Democrats offer bill to grant options on state tax refunds,” The Denver Post, April 18, 2016, http://tinyurl.com/j9hkndo. A Colorado bill co-sponsored by Democratic state representatives would allow taxpayers to receive refunds in multiple checking or savings accounts rather than as a lump sum, which proponents say would encourage families to save the money.

Nussbaum, Dave, “The science of human behavior is reshaping the US government,” Quartz, Nov. 10, 2015, http://tinyurl.com/nk9f4oq. President Obama signed an executive order in September 2015 encouraging agencies to boost efficiency by applying behavioral science findings to new or existing federal programs.

Rutter, Tamsin, “The rise of nudge – the unit helping politicians to fathom human behavior,” The Guardian, July 23, 2015, http://tinyurl.com/ztog9r2. A U.K. government-sponsored team has helped the country boost organ donor and army enrollment and increase police-force diversity, among other outcomes, by researching nudge tactics later implemented in government policies.

Poverty

Nolan, Hamilton, “Behavioral Science and Poverty,” Gawker, June 1, 2015, http://tinyurl.com/qh9jrsw. Anti-poverty programs should improve communication with participants, reduce sign-up paperwork and have accessible locations and operating hours, particularly for working people, says a report by a behavioral economics-focused nonprofit.

Semuels, Alana, “When the Government Tells Poor People How to Live,” The Atlantic, Dec. 14, 2015, http://tinyurl.com/gmlad74. The Worcester Housing Authority mandated in spring 2015 that most state-subsidized public-housing residents work or attend school to continue receiving housing benefits, a policy change that the agency’s director said is meant to help lift residents from poverty.

Zweig, Jason, “The Anti-Poverty Experiment,” The Wall Street Journal, June 5, 2015, http://tinyurl.com/o8ny5p8. Anti-poverty groups and agencies in the United States and other countries are working with psychology and economic researchers to test incentive programs that aim to help poor people save more money.

Organizations

American Economic Association
2014 Broadway, # 305, Nashville, TN 37203
615-322-2595
www.aeaweb.org
Academic society for U.S.-based economists that publishes several top scholarly journals.

The Behavioural Insights Team
33 Greycoat St., Westminster, London, SW1P 2QF, UK
info@behaviouralinsights.co.uk
http://www.behaviouralinsights.co.uk
The U.K.’s behavioral economics unit that inspired the White House’s effort.

Center for Advanced Hindsight
2024 W. Main St., Durham, NC 27705
919-660-7703
http://advanced-hindsight.com
Economist Dan Ariely’s research lab at Duke University that studies behavioral economics.

Economic Science Association
School of Information, University of Michigan, 105 S. State St., Ann Arbor, MI 48109
734-764-9488
https://www.economicscience.org/esa/index.html
Professional association for experimental economists.

European Association for Decision Making
Leeds University Business School, Maurice Keyworth Building, University of Leeds, Leeds, LS2 9JT, UK
44 (0)113 343 4473
http://eadm.eu
Association for researchers who study decision-making and judgment.

International Association for Research in Economic Psychology
Servicebox 422, N-4604, Kristiansand, Norway
47 38 14 15 12
http://www.iarep.org
Scholarly group for researchers that focuses on the intersection of economics and psychology.

Society for the Advancement of Behavioral Economics
PO Box 8130, 6700 EW Wageningen, The Netherlands
31.317.483897
http://www.sabeonline.org
Behavioral economics association for researchers.

DOI: 10.1177/237455680210.n1