Learn in detail from this article what behavioral economics is , and what its history and methodological foundations are.
behavioral economics
When we refer to behavioral economics, we are talking about the studies conducted on each of the behaviors or the different factors that define our economic decisions as individuals. These elements can be psychological, social, or cognitive.
It is important to understand that behavioral economics focuses on explaining the why of non-traditional behaviors within classical economics. If there is a behavior that does not fall within behavioral finance models, we may be facing a case that we are developing.
Different studies have determined that cognitive tendencies or human and social emotions can positively or negatively affect the different decisions that directly affect a market or the allocation of different financial resources.
The fields of study that face the correct development of these theories are mainly intertwined with what is the rationality of the human being, both in presence or absence. Different models have been made to evaluate the normal and typical behavior of individuals. These models range from a psychology point of view with neoclassical economic theory, to the integration of neuroscience, focusing on the neuroanatomical and neurophysiological bases of economic behavior.
These studies have determined that companies, organizations, and brands must make strategic changes to achieve what they consider a balanced marketing approach, unifying behavioral theory with various business practices. The results of these studies have also influenced market decisions and public choice, as both companies and consumers are aware of the weaknesses and strengths that have shaped their buying and selling decisions. If you want to understand more about these findings, you can visit the following link: Types of Competition
History of behavioral economics
It is important that we define how this concept has been developed and created in order to understand its foundations and principles. If we study the concept of what classical economics is, we will understand that it is an economic thought that was developed and explained by exponents Adam Smith, Jean-Baptiste Say and David Ricardo.
These philosophers paved the way for what is now known as the modern economic school which helps us affirm the different models that created the general framework of what is known as the capitalist model that was affirmed since the eighteenth and nineteenth centuries.
However, the term classical economics was awarded to Karl Marx, father of what is known today as Marxism. His studies were based on or referred to what is known as Ricardian economics, which is the theory that seeks to explain the pattern or owner of the organization and the profits that exist within trade based on comparative advantage. This assumes that there is perfect competition and that the only variable within the different organizations, companies or companies in the workforce.
With the introduction of this documentation, the different economists decided to stay away from the thought that psychology could somehow influence the economy. Creating in this way the concept of what is known as homo economicus which seeks to create models that achieve a theoretical representation of what would be the completely rational behavior to the economic stimuli of society and marketing.
However, these types of theories were gradually displaced by the different psychological explanations that determined how our emotional and psychological behavior determine the economy.
In the mid-XNUMXth century, psychological theories entered the study and development of behavioral economics again. Especially after different models of expected and discounted utility suffer different positioning under uncertainty consumption schemes.
It is for this reason that since 1960 cognitive comparison models are being made in order to make managerial decisions taking into account the different economic values and rational behaviors that may directly or indirectly affect our business.
Specific Foundations of Behavioral Economics
The theories of behavioral economics are based specifically on the demand of us consumers. These specifications focus on three main assumptions which can be defined as follows:
-
Preference
When referring to consumer preference is when organizations understand that at any given time we can choose one brand over another. This happens when organizations manage to convey their message in a well thought out way in delicate and highly sensitive moments.
-
Restrictions
Other fundamentals that behavioral economics constantly evaluates are the budget restrictions that each of the consumers may have.
-
Combinations
This foundation evaluates both preferences and each of the limited incomes and how prices can directly affect each one of us consumers, actively maximizing or reducing the profits of organizations.
These types of fundamentals create models of microeconomic behavior with the purpose that each of the protagonists, individuals or people manage to make decisions that have the capacity to positively affect the utility of our companies.
On the other hand, based on the theory of neoclassical economics by Matthew Rabin, we can find three deviations from the fundamentals that we have described above. Next, we describe each one of them:
-
non-standard preference
These are those elements that are a fundamental part of what the function of utility means. These elements are divided into two:
-
social preferences
They are those that include aspects of generosity and reciprocity. Based on the thought that human beings have the particularity of worrying about the common good, both individually and collectively.
-
temporary preferences
This foundation focuses on the tastes or preferences that we can have at a given time. This aspect is completely influenced by what is in trend and by the different provisions of the market.
-
-
non-standard beliefs
These elements speak of the importance of what decision-making means within organizations, companies, companies or brands. These are divided into:
-
Overconfidence
This is one of the factors that most constantly affects organizations. Believing themselves to be better or overestimating capabilities makes companies dictate completely unattainable objectives given their conditions.
-
law of small numbers
They manage to correctly manage the segmentation of a market, it does not mean that we always carry it out. Thanks to the fact that the numbers that support the market are constantly rising thanks to globalization.
-
-
Non-standard decision making
This is the last of the three deviations that we find with the neoclassical thinking of behavioral economics, which refers to the importance of the guideline in the different decisions, with maximization being the normal reference point.
-
Framing
This is a term that in behavioral economics is known as framing and is defined as the way in which the study results that are necessary for decision making are presented.
-
Heuristics
This definition focuses on the overestimation given to the different scenarios or possibilities within an event, taking into account the cognitive aspects of the human being.
-
It should be noted that the use of “non-standard” terms corresponds to the classification that the author Rabin gave to his study, managing to prioritize the best theories and predictions about the importance of human behavior within behavioral economics.
Behavioral economics methodology
When studying each of the methods that make up behavioral economics, we realize that each of them focuses on experiments, which can be in the laboratory or in the field. When we refer to the fact that they are experimental investigations, we are only talking about those behaviors that we are going to use as a basis for these analyses.
It should be noted that Vernon Smith, an American economist, has managed to lay the foundations for appropriately standardizing the different economic experiments. Smith's objective is to establish an experimental situation that seeks to achieve similar parameters that reveal the different preferences of each of the individuals that make up the experiment.
The aspects that are completely conditional and different from behavioral economics are eliminated in order to establish behavioral models that serve for the complete and in-depth study of these types of economics.
On the other hand, it should be noted that these factors manage to buy each of the predictions that are established within what is known as behavioral economics, ensuring that each of the different methodological conditions manage to meet impartial results within the experiments.
It is also important to note that the experiments that are carried out within a controlled space or laboratories are characterized by predominating since the beginning of behavioral economics. This has made the proliferation of different applications of neuroscientific measurements fully viable and accepted within behavioral economics.
In this same order of ideas, it is important to highlight that each of the control groups that are within what is known as the experimental design of behavioral economics in order to establish the random treatment that seeks to simulate situations that manage to isolate correctly the effects of a single measurement, through methodological guidelines to center each of the natural sciences within behavioral economics.
It is important to understand that qualitative research is a strange irregularity that identifies the methodology as being completely standardized in order to understand the behaviors that are being observed, managing to investigate each of the individual movements.
On the other hand, it is necessary to understand that the hypotheses per generation do not follow patterns that are uniform within the branch of behavioral economics, which seeks that the empirical orientation manages to achieve the behaviors that the inductive approach correctly implies within organizations.
To understand a little more each of these denominations we leave you the following video
Data to understand the Why of behavioral economics?
To continue to fully understand what behavioral economics means within these schemes that we have defined, we can find the following data:
-
economic revolution
Behavioral economics within these concepts has managed to gain strength in the last twenty years with the aim of introducing other sciences that feed what is this type of economy. Psychology, sociology and politics are fundamental factors that affect each of the markets that have been defined. According to the economist Shiller, the sciences of economics, sociology and politics cannot be separated since these aspects directly influence the market regardless of its foundation.
-
non-rational thinking
One of the reasons the economy has achieved specialization and the acceptance of ingredients is that it lends itself to the psychological thoughts our customers may have when making purchases. Rational thoughts are rarely accepted or embraced by organizations, companies, corporations, or brands, which can lead to detrimental marketing trends that they use to sell their brand. Creating disadvantages within the market so that we have the certainty of wanting to invest because we do not understand our psychological needs.
-
Do not misrepresent our interests
One of the reasons for the conventional or traditional economy is that it does not offer us an answer to our needs. At points where the economy has historically been affected, it has not had the capacity to respond in an acceptable manner to each of the individuals who are affected by it. One of the most notable examples within these specifications is the disproportionate increase in unstable economies where economic variations noticeably affect the different elements of the market.
-
Mainstream economics denies bubbles
When we talk about economic bubbles, we refer to a phenomenon that occurs in the market as a result of speculation within it. When economies suffer from abnormal and uncontrollable and prolonged rises, they create those so-called economic bubbles. Where the price of the assets that are affected reach extremely high levels, generating an explosion thanks to the fact that they are the few buyers that are obtained.
Applications of behavioral economics
Finally, we are going to observe how the concept of behavioral economics has been introduced in the different market levels to the point that it is considered a viable option so that companies can take it into account.
revenge effect
One of the reasons why companies must take into account this type of economy is that the feelings and capacities of the individuals that comprise our human resource can positively or negatively define the sales of our brand.
If we allow our staff to have negative or rude attitudes towards our customers, we can be completely sure that they will not return to our premises, will not make any type of purchase and that the reviews they will give us with their acquaintances are completely unfavorable. Therefore, it is advisable to prepare each of our employees correctly and appropriately to avoid inconveniences of this type.
However, if we have these inconveniences, we must assume our responsibility and excuse ourselves in order to maintain the harmony that must exist between us as an organization and our users or clients.
The good and the bad
Another of the characteristics that is necessary to take into consideration the application of behavioral economics is the study of our product and how it is captured by our users. If we work with products or services that can make our customers and users feel happy and calm, we can find a way to extend our services to guarantee creating a bond with each one of them.
If, on the other hand, our product or service generates stress or is related to moments of tension and sadness, it is advisable to attend to it quickly and with great tact. Empathy in this type of service is fundamental so that the client understands that he and her feelings at that moment are our priority.
Short and long term emotions
One of the most difficult things we have as an organization is to make the emotions of a given moment can be evoked at different moments over time. That is why different brands emphasize the importance of using or visiting the product as a family, this generates that the memory unconsciously manages to unify these two elements.
When that connection is made when we go through these places or when we use these products, they will automatically remind us of the moments or feelings that we have felt at that moment in our history, which makes us carry out the concept that we have been developing, behavioral economics.
Adaptation
If we offer products or services, one of the most serious mistakes we can make is not offering updates to our user customers. That is why even in the applications of new technologies, updates are offered in order to generate an adaptation process and a feeling of uncertainty and emotion, which allows us to remain current in the minds of our clients.
