5 everyday examples of behavioral economics
Click “Q&A: Behavioral Economics 101” to read the first post in the series.
Click “Must-see media list for behavioral economics” to read the third post in the series.
Our days are a whirlwind of activities—rushing from work, to the gym, to the store, and filling our time with errands, meals, and whatever else we need to do before we start all over again the next day. We are so absorbed in our routines that it’s difficult to have an awareness of the factors that influence us. Behavioral economics is so applicable because it explains some of our behavior that we don’t even think twice about.
For our second blog, we examine what principles of behavioral economics we encounter every day without even knowing it.
1. Playing sports
Principle: Hot-Hand Fallacy—the belief that a person who experiences success with a random event has a greater probability of further success in additional attempts.
Example: In basketball, when players are making shot after shot and feel like they have a “hot hand” and can’t miss.
Relation to BE: Human perception and judgment can be clouded by false signals. There is no “hot hand”—it’s just randomness and luck.
2. Taking an exam
Principle: Self-handicapping—a cognitive strategy where people avoid effort to prevent damage to self-esteem.
Example: In case she does poorly, a student tells her friends she barely reviewed for an exam even though she studied a lot.
Relation to BE: People put obstacles in their own paths (and make it harder for themselves) in order to manage future explanations for why they succeed or fail.
3. Grabbing coffee
Principle: Anchoring—the process of planting a thought in a person’s mind that will later influence this person’s actions.
Example: Starbucks differentiated itself from Dunkin’ Donuts through their unique store ambiance and product names. This allowed the company to break the anchor of Dunkin’ prices and charge more.
Relation to BE: You can always expect a grande Starbucks hot coffee ($2.10) to cost more than a medium one from Dunkin ($1.89). Loyal Starbucks consumers are conditioned, and willing, to pay more even though the coffee is more or less the same.
4. Playing slots
Principle: Gambler’s Conceit—an erroneous belief that someone can stop a risky action while still engaging in it.
Example: When a gambler says “I can stop the game when I win” or “I can quit when I want to” at the roulette table or slot machine but doesn’t stop.
Relation to BE: Players are incentivized to keep playing while winning to continue their streak, and to keep playing while losing so they can win back money. The gambler continues to perform risky behavior against what is in this person’s best interest.
5. Taking work supplies
Principle: Rationalized Cheating—when individuals rationalize cheating so they do not think of themselves as cheaters or as bad people.
Example: A person is more likely to take pencils or a stapler home from work than the equivalent amount of money in cash.
Relation to BE: People rationalize their behavior by framing it as doing something (in this case, taking) rather than stealing. The willingness to cheat increases as people gain psychological distance from their actions.
These behavioral economics principles have major consequences on how we live our lives. By understanding the impact they have on our behavior, we can actively work to shape our own realities.
As Dan Ariely, Ph.D., says in his book, “Predictably Irrational: The Hidden Forces That Shape Our Decisions,” “We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we made and the direction our life takes; but, alas, this perception has more to do with our desires—with how we want to view ourselves—than with reality.”
An awareness of behavioral economics helps us comprehend our actions so we can make better choices and live our lives in the driver’s seat.
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