What is ‘behavioral economics’?

Behavioral economics is is a branch of economics that conducts psychological experiments to understand how people make economic decisions.¹ These experiments have produced some interesting results about how we all make decisions about what to buy, that contradict the dominant idea of decision-making in economics (called Consumer Choice theory).

One interesting finding from behavioral economics is that the choices we make are shaped in large part by how they are presented to us, rather than by what they actually are. Imagine choosing between a healthy salad or an unhealthy cake at a food buffet, for example. Under consumer choice theory, you’d choose whichever made you the happiest for the price. But in practice, it’s not that simple – researchers have found that people are more likely to choose healthy food if it’s placed in a position that’s easier to reach than unhealthy food, and vice-versa.²  If you were simply basing your choice on utility, such a small change shouldn’t make a difference to your choice. But it turns out that ‘choosing’ the cake over the salad involves things that happen unconsciously.

And it’s not just where a product is placed. It’s whether we think it will help us fit into our social circle, whether we’ve made a habit out of buying something rather than genuinely considering whether it makes us happiest, and endless other similar factors which contribute to our decision-making in ways that are more complex than what consumer choice theory would have us believe.³