Behavioural economics is a fascinating field that combines psychology and economics to understand how people make decisions. It challenges the traditional economic assumption that individuals are rational and always act in their best interest. Instead, it recognizes that human behavior is influenced by various factors, such as emotions, biases, and social norms.
The Rise of Behavioural Economics
Behavioural economics has gained significant attention in recent years, thanks to the groundbreaking research of Nobel Prize winners Daniel Kahneman and Richard Thaler. Their work has paved the way for a new approach to studying economic behavior, one that takes into account the complexities of human decision-making. One of the key methods used in behavioural economics research is experiments.These experiments are designed to test theories and hypotheses about how individuals behave in different situations. In this article, we will explore some examples of experiments used in behavioural economics research.
The Ultimatum Game
The Ultimatum Game is a classic experiment used in behavioural economics to study fairness and cooperation. In this game, two players are given a sum of money, let's say $100. The first player, known as the proposer, is asked to divide the money between themselves and the second player, known as the responder.The proposer can offer any amount they want, but if the responder rejects the offer, neither player gets any money. According to traditional economic theory, the responder should accept any offer since getting something is better than nothing. However, in reality, responders tend to reject offers that they perceive as unfair. This experiment has been replicated numerous times with similar results, showing that people are willing to sacrifice their own gain to punish unfairness.
The Dictator Game
The Dictator Game is another popular experiment used in behavioural economics to study altruism and generosity. In this game, one player, the dictator, is given a sum of money and asked to divide it between themselves and another player.Unlike the Ultimatum Game, the second player has no say in the decision, and the dictator can keep all the money for themselves if they choose to. Again, traditional economic theory would predict that the dictator would keep all the money since they have no incentive to share it. However, in reality, most dictators choose to share some of the money with the other player, showing that people are not always solely motivated by self-interest.
The Trust Game
The Trust Game is an experiment used to study trust and cooperation between individuals. In this game, two players are randomly assigned the roles of investor and trustee. The investor is given a sum of money and can choose to send some or all of it to the trustee.The amount sent is then tripled by the experimenter. The trustee can then choose to return some or all of the tripled amount back to the investor. Traditional economic theory would predict that investors would not send any money since they have no guarantee that the trustee will return it. However, in reality, most investors do send some money, and most trustees do return some of it, showing that trust and cooperation are essential factors in economic decision-making.
The Hot Hand Fallacy
The Hot Hand Fallacy is a cognitive bias that refers to the belief that a person who has experienced success in a particular activity is more likely to experience success again in the future. This fallacy has been studied extensively in behavioural economics through experiments such as the basketball shooting experiment. In this experiment, participants were shown a video of a basketball player making shots from different positions on the court.They were then asked to predict whether the player would make the next shot. The results showed that participants were more likely to predict a successful shot if the player had made the previous one, even though each shot was independent of the others.
The Endowment Effect
The Endowment Effect is another cognitive bias that refers to the tendency for individuals to value something they own more than something they do not own. This effect has been studied in behavioural economics through experiments such as the mug experiment. In this experiment, participants were given a mug and asked to state the minimum price they would be willing to sell it for. Then, another group of participants was shown the same mug and asked to state the maximum price they would be willing to pay for it.The results showed that the minimum selling price was significantly higher than the maximum buying price, demonstrating the influence of ownership on perceived value.
The Power of Defaults
Defaults refer to the pre-selected options in a decision-making process. In behavioural economics, defaults have been studied through experiments such as the organ donation experiment. In this experiment, participants were presented with two options for organ donation: opt-in or opt-out. In countries where organ donation is an opt-in system, only a small percentage of people choose to donate their organs. However, in countries where organ donation is an opt-out system, a much higher percentage of people choose to donate their organs.This shows that defaults can have a significant impact on decision-making.