5 Steps to Improving Your Understanding of Behavioral Economics

Imageby Troy Campbell

Today, many individuals, governments and businesses are eager to use behavioral economics to improve lives, happiness, and profits. So, how can one get a good beginning handle on behavioral economics? Reading up and taking a class can never substitute for years of education in the topic, but taking these five steps can help improve your general thinking, help you better communicate with behavioral experts, and help you develop an experimental mindset.

 

So what is behavioral economics? (A quick run down)


Behavioral economics, or behavioral sciences, applied psychology, business psychology, decision making, or whatever title you prefer, is the study of human irrationality, decision making, self-control, and emotions.

This past year has served as a symbolic victory for the field. Daniel Kahneman, widely considered the founder of the field, released the book Thinking, Fast and Slow and won the Medal of Freedom, the highest civilian honor in America, to go along with his International Nobel Prize. The United States government also opened a “Behavioral Insights” team with the goal of integrating behavioral research into government policy.

Behavioral science is becoming a staple in business and public policy. Energy companies use social comparison with neighbors to reduce energy consumption and businesses help people “save more tomorrow” by having them commit to automatic enrollment in the future. Rather than just assuming that people will save energy and manage their retirement with perfect rationality, behavioral economics accepts and defends the idea that people will not always be motivated by rationality or cash alone. Instead, it examines what actually motivates people.

Alright, so most likely you don’t have time to hire your own private behavioral insights team. So, what can you do? Here’s how to improve your understanding a little bit.

#1 Accept that humans are irrational.

ImageIn his book Critical Decisions, behavioral scientist Peter Ubel concludes that humans are neither completely rational nor completely irrational, but argues that people attempt to understand others logically far too often.

For instance, how many times have you tried to logically argue with a friend or co-worker? Did it go well? Probably not. Why? Because logic does not exclusively dictate human behavior. Emotions, self-control, and a person’s life history greatly influence behavior.

One big takeaway from behavioral science is that we must continually consider factors other than rationality that can influence people’s behavior. So step one: remember people are irrational and that logic alone will rarely win the day.

#2 Think about your own psychological quirks.

ImageOne of the best ways for us to recognize irrational behavior in others is to first recognize it in ourselves.

You may have noticed that you tend to be less rational when you’re tired. You may have noticed that you sometimes act with prejudice. For instance, just think of the last time you saw someone wearing a jersey from an opposing sports team. Did you automatically assume negative things of them? 

Understanding how you, (presumably) a good and sane person, can commit errors in judgment will allow you to see, understand, and empathize with others’ all too human behavior.

Starting to understand patterns of irrationality or imperfect decision-making can help you understand people’s “predictable irrationalities” – the ways in which people act predictably like humans rather than rational perfect machines.

#3 Watch science on TED.com.

ImageTED.com has a collection of behavioral economics talks, which are great for understanding the mindset of a behavioral scientist. The talks cover topics such as how to think about happiness, memory, honesty, or decision-making. Start with talks by Rory Sutherland, Daniel Kahneman, or the Center for Advanced Hindsight captain, Dan Ariely, and you will start to get into the mindset. From there, click the related videos. After a couple hours of those videos, you will be ready for some reading.

 

#4 Starting reading. And here’s what to start with.

ImageBooks – To begin, start with a hit from the behavioral sciences such as Thinking, Fast and Slow or Predictably Irrational. Books with fantastic prose from authors like Malcolm Gladwell are good to check out, but it is best to start with a book that intensely focuses on the research. This will help you build a solid foundation.

Online – Next follow a blog or twitter account from at least one of these behavioral experts: @Nudgeblog, @DanTGilbert, or @RorySutherland (there’s lots more but these are three random ones to give you a good start). By following the experts, you may also have access to occasional live twitter conversations between them — another entertaining way to learn. And, of course, follow the lab @advncdhindsight‎ and @DanAriely.

Local – Locate professors at your local university who conduct behavioral economics, social psychology, or decision-making research. Follow their blogs, check out their university talks, and even get some face time with them at local events. Academics are generally pretty open, so go spend time with them!

#5: How to read. – This one is important!

ImageDo not binge and forget. Instead, spread out your reading. Due to the availability bias in human reasoning, things that you learn and even know deep in your memory may not be “on top of the mind.” Just because you learned something once doesn’t mean you’ll be in the state of mind to always use that knowledge.

Reading a little but often keeps behavioral economics on the top of your mind. So, when you encounter a situation where someone is acting odd, the behavioral economist inside of you will always be primed and ready to interpret the situation.

 

A final reminder

However, we remind you that even a person with Ph.D in behavioral economics can’t always predict what exactly will happen. Science is about consist using hindsight to improve foresight. Not matter how much advanced hindsight you’ve paid attention to life, there can never be enough. That’s why it is also important to always put your hypotheses to a test. If your in a business try an experiment or use online survey polls (e.g. Mechanical Turk) to get some initial data or feedback. Thinking like a scientist means being comfortable with the fact you don’t know everything.

Those who realize how much they don’t know will end up knowing the most.