The paper "The Business of Behavioural Economics by Michael Blanding" is a delightful example of an article on business. The concept of behavioral economics is based on the idea that, although human beings are rational creatures, some of human being’ s actions, however, are motivated not by right reason but by human passions and appetites; behavioral economics takes cognizance of the fact that human beings sometimes act contrary to what they know to be true. For instance, a married man or woman may engage in extra-marital affairs while knowing very well that such an engagement is wrong and unethical.
According to the standard economic theory, such a man cannot engage in extra-marital affair unless in his analysis of advantages and disadvantages of such action an action reveals to him that the advantages of engaging in extra-marital affairs outweigh the disadvantages of the same action. Unlike the behavioral economic theory, therefore, the standard economic theory assumes that human beings are always guided by right reason in all their actions. One of the tenets of behavioral economics is the idea that people tend to be overly optimistic about their sense of control.
What this means, in essence, is that people generally tend to overestimate their capabilities in regard to controlling their emotions and their passions. In my opinion, it is true indeed that human beings generally tend to think highly of themselves and their potentials more than they really are; this fact can be attributed to the fact that it is actually difficult to know our potentials and our capabilities till we try to engage in something challenging. For instance, an alcoholic may overestimate his ability to abstain from drinking alcohol and promise to easily abstain from alcohol, only to realize later that he/she is not capable of such abstinence without help from other people.
This concept of behavioral economics is applicable in situations where one is required to commit himself/herself to an ambitious undertaking. The second main tenet of behavioral economics is the view that human beings are much more averse to losing something they have than they are inclined to gaining something they don’ t have. What this means, in essence, is that human beings generally value what they have more than what they are aiming to get in the future.
In my view, human beings develop an attachment to the things they have and this attachment makes them value what they have more than what they are hoping to have; this is because they have virtually no attachment to the things they are hoping to get. For instance, a business man may feel much more pain in losing $500 through theft, than he would feel pleasure for making a profit of $500.This fact means that the businessman has developed more attachment to the $500 worth products that have been stolen, than the $500 loss that he would make in his business.
This concept of behavioral economics is applied in business organizations to help business organizations in changing bad habits that they are addicted to like smoking and other bad habits. The third major tenet of behavioural economics is the idea that human beings are motivated to behave in a manner consistent with the social norms of the society and the cultures in which they live.
What this means is that social norms are a strong impetus in the behaviour of human beings- human beings normally feel more comfortable in doing things that the society approves, more than doing things that the society prohibits. In my view, it is true indeed that human beings seeks to conform to the social norms in their actions; this is because acting in accordance with social norms leads to approval by the society, while acting in contrary manner leads to disapproval by the society. For instance, in a society where bravery is praised, people in that society are more willing to act in a brave manner than people living in a society where bravery is not praised.
Behavioural economics, therefore, seek to exploit this reality of human nature by applying it to business, so as to increase the profits of business.