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Behavioral Economics & Nudge Theory

Behavioral economics combines elements of psychology and economics to understand why people make irrational decisions that differ from traditional economic models which assume rational decision making. It examines the gap between actual and rational human behavior and the consequences. Research in behavioral economics has identified cognitive biases and emotional factors that influence decision making. This contrasts with models treating people as purely rational actors. Nudge theory proposes that small, non-coercive environmental changes can subtly influence behaviors through cognitive biases without restricting choice freedom.

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441 views2 pages

Behavioral Economics & Nudge Theory

Behavioral economics combines elements of psychology and economics to understand why people make irrational decisions that differ from traditional economic models which assume rational decision making. It examines the gap between actual and rational human behavior and the consequences. Research in behavioral economics has identified cognitive biases and emotional factors that influence decision making. This contrasts with models treating people as purely rational actors. Nudge theory proposes that small, non-coercive environmental changes can subtly influence behaviors through cognitive biases without restricting choice freedom.

Uploaded by

yai gini
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Behavioral Economics

Behavioral economics combines elements of economics and psychology to understand how and
why people behave the way they do in the real world. It differs from neoclassical economics,
which assumes that most people have well-defined preferences and make well-informed, self-
interested decisions based on those preferences. Shaped by the field-defining work of University
of Chicago scholar and Nobel laureate Richard Thaler, behavioral economics examines the
differences between what people “should” do and what they actually do and the consequences of
those actions.

Behavioral economics is grounded in empirical observations of human behavior, which have


demonstrated that people do not always make what neoclassical economists consider the
“rational” or “optimal” decision, even if they have the information and the tools available to do
so.

For example, why do people often avoid or delay investing in 401ks or exercising, even if they
know that doing those things would benefit them? And why do gamblers often risk more after
both winning and losing, even though the odds remain the same, regardless of “streaks”?

By asking questions like these and identifying answers through experiments, the field of
behavioral economics considers people as human beings who are subject to emotion and
impulsivity, and who are influenced by their environments and circumstances.

This characterization draws a contrast to traditional economic models that have treated people as
purely rational actors—who have perfect self-control and never lose sight of their long-term
goals—or as people who occasionally make random errors that cancel out in the long run.

Several principles have emerged from behavioral economics research that have helped
economists better understand human economic behavior. From these principles, governments
and businesses have developed policy frameworks to encourage people to make particular
choices.

What Is Nudge Theory in Behavioral Economics?


In behavioral economics, a “nudge” is a way to manipulate people’s choices to lead them to
make specific decisions: For example, putting fruit at eye level or near the cash register at a high
school cafeteria is an example of a “nudge” to get students to choose healthier options. An
essential aspect of nudges is that they are not coercive: Banning junk food is not a nudge, nor is
punishing people for choosing unhealthy options.

Nudge theory is a concept in behavioral science that proposes that small, non-coercive changes
to the environment can influence people’s behavior in predictable ways. This theory suggests
that people can be “nudged” towards certain behaviors, such as saving for retirement or
recycling, by providing them with information or by making certain choices more convenient or
appealing. The goal of nudge theory is to help people make better decisions without restricting
their freedom of choice. It is based on the idea that people are not always rational and that they
are influenced by a variety of factors, such as emotions, social norms, and cognitive biases.
Nudge theory has been applied in a range of fields, including public policy, marketing, and
organizational behavior. However, in the real world nudges have not been shown to be effective.
They either have no impact or an exceedingly small impact.

For additional Details Please refer to the following link:

What is Behavioral Economics? - University of the People (uopeople.edu)

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