Read the second post in this series, “5 everyday examples of behavioral economics“, to learn about how behavioral economics is applied in our day-to-day lives.
Read the third post in this series, “Must-see media list for behavioral economics“, to discover a list of resources to help you learn about the field outside of the classroom.
We talked with the Associate Department Chair for Business Psychology and Program Chair for Behavioral Economics, Elizabeth Schwab, Psy.D., to learn the basics. Dr. Schwab developed the online masters in behavioral economics.
{INSIGHT}: What is behavioral economics?
Elizabeth Schwab, Psy.D.: Behavioral economics is the study of judgment and choice. It’s about decision making. It was originally born out of this idea that economists—who were trying to explain consumer behavior—discovered anomalies in the models they were using. These economic models weren’t able to explain all of human behavior. And that’s where behavioral economics stepped in with the help of psychologists.
{INSIGHT}: How does the behavioral economics program differ from an online economics degree?
Dr. Schwab: Economics degrees really focus on traditional economic formulas and models for consumer behavior. Behavioral economics, especially our program in particular, is grounded in psychology. We study the mechanisms behind what economists observe and predict.
The other difference is economists assume perfect rationality, which means that they assume that people will always do what’s in their best self-interest. Behavioral economics explicitly says no, people are actually irrational. That’s why there are anomalies in economic models because those models assume rationality.
{INSIGHT}: Prospect theory, a behavioral model that shows how people decide between alternatives that involve risk and uncertainty, is a huge component of behavioral economics. But what exactly is “risk”?
Dr. Schwab: Risk is about this idea of incomplete information. We don’t know what’s going to happen in a situation, we can’t predict it, and so it becomes risky. When things are risky, we act in different ways.
It’s not difficult to get in your car and understand how to drive if you’ve done it a hundred times. It becomes an automatic process for you. On the other hand, if it’s your first time, you’re 15, and you have your learner’s permit, then you’re thinking a little more slowly about everything. It’s risky. We start to learn and adapt to situations and then make decisions differently depending on our emotions, familiarity, and comfortability.
{INSIGHT}: What is your favorite thing about behavioral economics?
Dr. Schwab: The relatability to real life—the fact that so much of it feels intuitive. You read some of the findings, and about what people are studying and it’s so easy to say, “Yes, I’ve had an experience with that.”
I think there’s a real movement in this field to make behavioral economics more applied, to make it friendlier for the layperson. How do I use this in my real life? How do we bring this into people’s lives and help them be more aware of consumers (in terms of making better decisions and choices) and be more aware of their fallibility as humans?
For more, read the second blog on real-life applications of behavioral economics “5 everyday examples of behavioral economics.” Learn more about our online masters in behavioral economics here and must-see media options for behavioral economics here.
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