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Behavioral Economics: fun facts and quiz
The essentials in 7 ideas, with fun facts, an illustrated story and a quiz to see how much you know.
The essentials
Not So Rational
Classic economics assumed people always choose logically. Behavioural economics studies how real people actually decide, shortcuts and all.
Key fact
Daniel Kahneman, a psychologist, won the 2002 Nobel in economics for it.
Loss Aversion
Losing 10 euros feels worse than finding 10 euros feels good. Studies suggest losses hit us roughly twice as hard as equal gains.
Key fact
That’s why “don’t miss out” offers work so well.
The Power of Defaults
People tend to stick with whatever option is already set. When organ donation is opt-out, far more people end up registered.
Key fact
Automatic pension enrolment greatly boosted saving in the UK.
Mental Accounting
We treat money differently depending on where it came from: a tax refund or a birthday gift often gets spent more freely than wages.
Key fact
Money is money, but our brains put it in different pots.
Nudges
A nudge changes how choices are presented without banning anything, like putting fruit at eye level in a canteen. Richard Thaler won a Nobel for this work in 2017.
Key fact
Painted flies in urinals famously cut spillage at Amsterdam’s airport.
Present Bias
We value rewards now much more than rewards later. That’s why saving, healthy eating and exercise are hard, even when we plan them.
Key fact
Committing in advance, like automatic saving, helps beat it.
The Decoy Effect
Adding a third, worse option can steer choices. A medium popcorn priced almost like the large makes the large look like a bargain.
Key fact
Cinemas and cafés often use decoy pricing.
Fun facts
Kahneman’s partner in this work, Amos Tversky, died in 1996, too soon to share the prize.
Pro golfers putt more accurately to save par than to score a birdie: avoiding a loss drives them harder.
In one study, opt-out Austria counted almost everyone as an organ donor; next-door Germany, with opt-in, about 12%.
People tend to spend more with cards than with cash, because paying by card doesn’t feel like losing money in the same way.
Richard Thaler joked that he’d spend his Nobel prize money “as irrationally as possible”.
Many prefer 100 euros today to 110 next week, yet choose 110 in 53 weeks over 100 in 52. Same wait, different choice.
In one famous test, adding a print-only offer at the same price as print-plus-web made far more people choose the bundle.
Story: The Offer Nobody Wanted
The Offer Nobody Wanted
A real advert from The Economist: a web subscription for $59, print for $125, or print and web together, also for $125.
Nobody wants print alone. But when economist Dan Ariely showed the offer to 100 students, 84 picked the print-and-web deal.
Then he removed the print-only option. This time, most chose the cheap web subscription. The useless option had been doing the selling.
True or false?
Tap your answer to see if you got it, and why.
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Question 1 of 10
Behavioural economics studies how people really make choices.
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True. Including the mistakes we make.
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Question 2 of 10
Losses tend to feel stronger than equal gains.
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True. About twice as strong.
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Question 3 of 10
Default options strongly influence choices.
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True. Most people keep them.
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Question 4 of 10
People often treat windfalls differently from wages.
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True. Found money feels like “fun money”.
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Question 5 of 10
A nudge steers choices without banning options.
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True. You’re still free to choose.
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Question 6 of 10
People tend to prefer rewards now over bigger ones later.
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True. Now feels more real than later.
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Question 7 of 10
A decoy option can make another option look better.
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True. By comparison.
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Question 8 of 10
Behavioural economics assumes people always act perfectly logically.
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False. It studies how they don’t.
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Question 9 of 10
People feel gains much more strongly than losses.
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False. It’s the other way round.
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Question 10 of 10
People always change the default setting.
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False. Most leave it as it is.
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KnowSoda learns what you know and brings back what you’re about to forget. Behavioral Economics has 6 more ideas at the Advanced and Expert levels.
Sources
- Nobel Prize — Economic sciences 2002 (Kahneman) and 2017 (Thaler)
- Johnson & Goldstein (2003), “Do defaults save lives?”, Science 302
- Thaler & Sunstein (2008), Nudge: Improving Decisions About Health, Wealth, and Happiness
- Dan Ariely (2008), Predictably Irrational (the decoy effect)
- Kahneman, Knetsch & Thaler (1990), experimental tests of the endowment effect, Journal of Political Economy 98
- Iyengar & Lepper (2000), when choice is demotivating, Journal of Personality and Social Psychology 79
- Mani et al. (2013), poverty impedes cognitive function, Science 341
