Behavioural economics is a field that combines psychology and economics to understand how people make decisions, including decisions related to personal loans. It challenges the traditional economic assumption that individuals are rational and always make decisions that maximize their own self-interest. Instead, behavioural economics recognizes that human behaviour is influenced by a variety of factors, including social norms.
The Basics of Behavioural Economics and Personal Loans
In traditional economics, individuals are assumed to be rational decision-makers who weigh the costs and benefits of each choice and make decisions that will bring them the most utility. However, behavioural economics takes into account the fact that humans are not always rational and can be influenced by emotions, biases, and social norms. Behavioural economists study how people make decisions about personal loans in real-world situations, rather than in hypothetical scenarios. They use insights from psychology to understand why people make certain choices and how they can be nudged towards making better decisions.The Influence of Social Norms
Social norms are unwritten rules that govern behaviour within a society or group.They dictate what is considered acceptable or unacceptable behaviour and can vary across cultures and contexts. Social norms can have a significant impact on individual decision-making, as people often conform to these norms to fit in and avoid social disapproval. In behavioural economics, social norms are seen as a powerful force that can shape behaviour. People tend to follow the actions of others, especially when they are uncertain about what to do. This phenomenon is known as social proof or herd mentality.
For example, if everyone in a group is ordering dessert after dinner, an individual may feel pressured to do the same, even if they were not planning on it. Social norms can also influence behaviour through the concept of reciprocity. When someone does something for us, we feel obligated to return the favour. This can lead to a cycle of giving and receiving, which can be beneficial for both parties. For example, if a friend helps you move, you may feel compelled to help them when they need it.
The Impact on Decision-Making
Social norms can have a significant impact on decision-making, both in positive and negative ways.On the positive side, social norms can encourage individuals to engage in pro-social behaviour, such as donating to charity or volunteering. They can also promote healthy behaviours, such as exercising or eating well, if these behaviours are seen as the norm within a particular group or community. However, social norms can also lead to negative outcomes. For example, if a social norm within a group is to engage in risky behaviours, such as binge drinking or drug use, individuals may feel pressure to conform and engage in these behaviours even if they do not align with their personal values. Social norms can also influence economic decisions. For instance, people may be more likely to save money if they perceive it as the norm within their social circle.
On the other hand, if spending money is seen as the norm, individuals may be more likely to make impulsive purchases and accumulate debt.
The Role of Social Norms in Nudging
Nudging is a concept used in behavioural economics to influence people's behaviour without restricting their choices. It involves making small changes in the environment or context to encourage individuals to make better decisions. Social norms play a crucial role in nudging because they can be used to shape behaviour without imposing any restrictions. For example, a study conducted by behavioural economists at Cornell University found that displaying messages about energy conservation that emphasized social norms (e.g., "Most people in this neighbourhood turn off their lights when leaving a room") was more effective in reducing energy consumption than messages that focused on saving money or protecting the environment. Another example of nudging through social norms is the use of social comparison. People tend to compare themselves to others, and this can influence their behaviour.For instance, if a person sees that their neighbours are using energy-efficient appliances, they may be more likely to do the same to keep up with the norm.