Behavioral Economics: what we think we do vs what we actually do.
Traditional economic theory relies heavily on the assumption that most people make rational choices that are optimized and in their best interest
Should I sell my stock? Should I buy that ice cream? At what price should I list my house for sale?
Governments, banks, and investors traditionally rely on the assumption that the cumulative effect of those rational choices is even more rational, optimized, and in the best interest (in the long haul) of the society at large. They use that assumption of rational choice to make hugely impactful policy decisions.
Should interest rates be raised? How freely should credit be given? Should vaccines be mandated?
The trouble is that people make choices that are predictably irrational, and that we are largely unaware of the factors causing this irrationality. Many of these factors appear to apply across the human population. Their cumulative impact is to make decisions even less rational or beneficial to society at large.
Behavioral economics attempts to uncover the psychological, cognitive, emotional, cultural and social factors that influence our decisions in ways that are predictably irrational. It looks at the choices people and institutions actually make, contrasts that with the most logical choices, and endeavors (often through clever experiments) to figure out the reason for the difference.
People trying to sell things (politicians, marketers, some congregations) have found behavioral economics extremely useful. By getting people to make decisions guided by predictable irrationality, rather than strict rationality, you can sell a whole lot of stuff that is against the best interest of individuals and society.
A small sample of the findings:
Bounded rationality - people have limited time and energy to analyze every single choice they make (there are 35,000 decisions to be made in a single day). So by making the choice one wants them to make the easy and rewarding, they will make that choice without you having to ask them directly.
Loss aversion - people are much more concerned about losing $20 than gaining $20. Hence tax aversion and a lot of insurance sales.
Action bias - people may feel compelled to take action even if action is not beneficial. Hence incessant news watching and the honking of car horns when traffic is gridlocked..
Fundamental attribution error - people often assume that others are in bad situations because of their personal flaws rather than because of circumstances. Conversely, people who win a game after being given an advantage over their opponent tend to believe they have won because of their skill, even when they are aware of the advantage they were given. Hence wealthy white people tend to believe they have become wealthy because of their hard work and intelligence, and poor black people are poor because they are lazy and stupid.
Illusory truth effect - people will often come to believe a false statement if it is repeated often enough, or at least start to doubt their own reality, even if they know the statement is false to begin with. Often utilized by social media influencers.
Zero risk bias - a tendency to prefer the complete elimination of risk in a sub-part over alternatives with greater overall risk reduction. Hence people’s decision to avoid the tiny risk of taking a vaccine despite its reduction of the greater risk of serious illness from the disease it prevents.