For generations, economists have tried to describe purchasing and investment decisions with the assumption that all humans make rational, selfish decisions. Behavioral economics is a branch of economics study, mostly started by psychologists, that analyzes the real reasons behind people’s purchasing decisions. It has torn away the notion that human purchasing decisions are made for rational reasons, and it questions whether all purchasing decisions are inherently selfish.
To keep up with innovative research in behavioral economics, prospective students can start by following these five economists. Their work is reshaping both business strategy and government policy all over the world.
1. Dan Ariely
Duke University behavioral economist Dan Ariely became a well-known name after publishing “Predictably Irrational” in 2008. His argument is that although humans behave irrationally, economists can predict what their irrational behaviors will be.
Ariely once conducted an experiment in which he offered students a choice between Lindt truffles and Hershey’s Kisses. When the Hershey’s kisses cost one cent, students overwhelmingly chose Lindt truffles. However, when the Hershey’s Kisses were free, seven out of 10 students chose the Hershey’s Kiss. Ariely postulated that when an item was free, people perceived the free item as more valuable than it actually was. Businesses could take advantage of predictable irrationality related to free items by offering free services to their customers. For instance, when Amazon began offering free shipping for orders of $25 or more, the company saw a large increase in sales.
2. Ernst Fehr
Ernst Fehr of the University of Zurich uses techniques like trans-cranial stimulation and functional MRI to study how people’s brains react when they’re placed in purchasing situations. Fehr has done experiments on what he calls “altruistic punishment,” demonstrating that people will spend scarce resources to punish someone else that has divided a sum of money unfairly. In fact, people will punish the offender even when punishment provides no financial benefit. Fehr has also worked extensively to debunk the classical economics notion that all purchasing decisions are selfish. Fehr published a book in 2002 entitled, “Why Social Preferences Matter: The Impact of Non-Selfish Motives on Competition, Cooperation and Incentives.”
3. Daniel Kahneman
Princeton University’s Daniel Kahneman is a Nobel Prize winner and developer of the “peak-end rule.” This rule states that people only remember two parts of any experience: the high and low points as well as the end of the experience. He also published a book in 2011 called “Thinking Fast and Slow” in which he discussed two systems of human thought. System One creates a snapshot of reality based on limited evidence; it’s the “blink” of Malcolm Gladwell’s famous book of the same title. System Two reasons through problems more slowly, but it’s not always as compelling as System One. Kahneman’s conclusion: Rely on System One when a situation is well-known. At other times, rely on System Two to avoid making impulsive choices.
4. Simon Gächter
Simon Gächter of the University of Nottingham primarily studies how people respond to incentives. He also studies the effect of loss aversion, or the unwillingness to suffer loss, on people’s willingness to take risks. He has also written about the importance of properly framing decisions before making them. For example, Gächter argues in a paper called “Games and Economic Behavior” that framing decisions by offering cues of social norms, laws and promises can influence the choices that they make. Frames shape beliefs, says Gächter, and beliefs, particularly about the behavior of others, can shape both motivation and choice.
5. George Lowenstein
George Lowenstein, a professor at Carnegie Mellon University, has three main research focuses: intertemporal choice, which involves decisions between costs and tradeoffs at different points in time; why negotiations often fail; and how accurately people can predict their own behavior. One of Lowenstein’s main arguments is that defaults, or actions that will take place unless a person explicitly chooses otherwise, have a major effect on decision-making. The main reason, Lowenstein hypothesizes, is that people often perceive defaults as recommendations. They also associate “switching costs” with defaults, which make them less likely to change from their default positions.
People who are thinking of studying economics should look for universities offering well-rounded graduate programs. For example, after earning an MA in Economics from American University, students could complete further study in American’s Ph.D. program in Behavior, Cognition and Neuroscience. But before the new school year begins, students can get a head start and keep up with economic news by following these stand-out economists.