Question

Explain what we mean by behavioral economics. How might the insights in this area be useful as we are analyzing the economy? Pick one of the common behavioral mistakes that people often make when confronting economic decisions; explain the mistake and illustrate your choice with an example that demonstrates the behavior in question.

Answer 1

Behavioural economics as the name suggests is the study of human behavior and emotions on thetheir economic decisions. It is a branch of economics that studies the impact of cognitive, cultural, emotional, social factors on the decision making habits of an individual.

Businesses entire markets with an intention of making a profit. They are guided by selling googoods or services to the customers. For their goods to be successful, they need to meet an unmet need. Needs are highly guided by the way we think, the emotional attachments we have, the culture and social identity we have. Understanding these aspects of buyers in the target market will help Firms develop goods and services or alter the existing ones to meet these needs and behavior and in turn will help the company stay in the market .

One of the most common mistake is

Value now over later .

When consumer shop they often then to buy things under the mindset of having the product now and thinking of how everything will be OK in the future. This mindset does not let them make logical decisions of buying something that is not urgent now later and often they tend to regret this decision. Eg. A women may buy an extra pair of shoes on the credit card that has a certain higher limit. When buying since money (plastic) is available for now that however needs to be paid later with interest she is carried away with the thought that she will earn later and repay. This however may be difficult.