Description: What is Behavioral Economics? Well it is the area (of Economics) in which a Psychologist, Daniel Kahneman, won a Nobel prize in 2002 for his work (in Psychology) on how human beings make decisions about money and about other things. It is the area of study that looks at the ways in which we (irrationally) make decisions. Think about this question. Which of the following would you feel more strongly about… losing $5 OR winning $5? Behavioral Economics research has suggested that we are more “loss averse” and as such would feel more strongly about losing $5 than we would about winning $5. This is supposed to be (again according to Behavioral Economics) why we can be “nudged” to do more healthy things by being told what we will lose if we don’t and to contribute regularly to a retirement savings plan by being told what we would lose in the way of comfort and security of we do not. So is lose aversion a broadband explanation for a lot of our behavior? Well, think about this “what if”. What if someone gave you a mug (nothing fancy, just a coffee mug). What price would you set the mug at if it were suggested that you try and sell it? What if you did not get a mug? What price would you pay for a mug being offered for sale. Well when social psychologists asked people these questions the results were straightforward. People would sell their mugs for and average of $7 but if they did not have one they would agree to buy one for $3 on average. Why? Perhaps because those with mugs were more averse to losing them that those who did not have a mug thought they would be happier if they bought one – so loss aversion, right? Well think about it. Can you come up with another explanation? Once you have thought about it have a look at the article linked below and see what the author, a social psychologist thought and what he did to test his alternative hypothesis.
Source: Why Is Behavioral Economics So Popular? David Gal, The New York Times.
Date: October 6, 2018
Photo Credit: Michael DeForge
So, what do you think of Dr. Gall’s inertia hypothesis? He is a professor of marketing and so is particularly interested in the application of behavioral economics to marketing campaigns. The loss aversion hypothesis has led a LOT of marketing groups to develop sales campaigns for their products or services that try and focus potential buyers on what they will lose if they do not make use of the proffered product or service. The problem is that a large meta-analytic study found that there was NO statistical advantage to public health campaigns structured around loss aversion – no positive behavior changes. So, here is a challenge for Behavioral Economists (or for Psychologists working on Behavioral Economics questions from a Psychological perspective in search of another Nobel prize). When IS loss aversion at play, when is it NOT at play and what are the situational effects that drive those differences? The marketers and public health advocates of the world are waiting for and need answers to these questions!
Questions for Discussion:
- What is loss aversion? Provide a couple of examples.
- What sorts of areas might rely on research done within Behavioral Economics (done by Psychologist or others)?
- What alternative explanation was offered to loss aversion in the article linked above? What does the alternative explanation suggest we should do with the notion of loss aversion?
References (Read Further):
Lindsey, V. W. (2010). Encouraging Savings Under the Earned Income Tax Credit: A Nudge in the Right Direction. U. Mich. JL Reform, 44, 83. http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=1120&context=facpub
Zywicki, T. J. (2016). Do Americans Really Save Too Little and Should We Nudge Them to Save More: The Ethics of Nudging Retirement Savings. Geo. JL & Pub. Pol’y, 14, 877. https://www.peter-boettke.com/app/download/7120277508/Zywicki_PPE.pdf
Gal, D., & Rucker, D. D. (2018). The loss of loss aversion: Will it loom larger than its gain?. Journal of Consumer Psychology.
Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. The quarterly journal of economics, 106(4), 1039-1061. http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.5.1.193
Wang, M., Rieger, M. O., & Hens, T. (2017). The impact of culture on loss aversion. Journal of Behavioral Decision Making, 30(2), 270-281. https://www.researchgate.net/profile/Mei_Wang8/publication/293045101_The_Impact_of_Culture_on_Loss_Aversion/links/5b7153cfa6fdcc87df739813/The-Impact-of-Culture-on-Loss-Aversion.pdf