Behavioural economics is a 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 own self-interest. Instead, behavioural economics recognizes that humans are influenced by a variety of factors, including social preferences.
The Basics of Behavioural Economics
Behavioural economics emerged in the late 20th century as a response to the limitations of traditional economics. While traditional economics assumes that individuals make decisions based on rational calculations of costs and benefits, behavioural economics recognizes that humans are not always rational.We are influenced by emotions, biases, and social norms. One of the key principles of behavioural economics is that individuals do not always make decisions that maximize their own self-interest. Instead, we often make decisions based on social preferences, which are our preferences for how others should behave. These preferences can include fairness, reciprocity, and altruism.
The Role of Social Preferences
Social preferences play a crucial role in behavioural economics because they influence our decision-making processes. For example, our sense of fairness can impact how we respond to economic incentives.In traditional economics, it is assumed that individuals will always choose the option that maximizes their own self-interest. However, in reality, we often reject offers that we perceive as unfair, even if it means sacrificing our own gain. Reciprocity is another important social preference in behavioural economics. This refers to the idea that we feel obligated to return favors or kindnesses that have been done for us. This can influence our decision-making in situations where we feel indebted to someone else. Altruism is also a significant social preference in behavioural economics.
This refers to our desire to help others, even at a cost to ourselves. Altruism can influence our decision-making in situations where we have the opportunity to help others, such as donating to charity or volunteering our time.
Examples of Social Preferences in Action
One classic example of social preferences in action is the Ultimatum Game. In this game, one player is given a sum of money and must propose how to split it with the other player. If the other player accepts the offer, both players receive their respective shares.However, if the other player rejects the offer, neither player receives any money. In traditional economics, it is assumed that the first player will offer the smallest possible amount, and the second player will accept it because any amount is better than nothing. However, in reality, many players reject offers that they perceive as unfair, even if it means receiving nothing. This demonstrates how our sense of fairness can influence our decision-making. Another example is charitable giving. Traditional economics would suggest that individuals should only donate to charity if they receive something in return, such as a tax deduction or a good reputation.
However, research has shown that individuals are more likely to donate when they feel a sense of altruism and a desire to help others.
The Impact of Social Preferences on Policy
The recognition of social preferences in behavioural economics has significant implications for policy-making. Traditional economic policies often rely on incentives and penalties to influence behaviour. However, if individuals are not solely motivated by self-interest, these policies may not be effective. For example, consider a policy that offers financial incentives for people to quit smoking. While this may work for some individuals who are primarily motivated by financial gain, it may not be effective for those who are also influenced by social preferences such as peer pressure or a desire to fit in with a group. Behavioural economics suggests that policies should take into account social preferences and design incentives that align with them.For example, a policy to reduce smoking rates could also include social support groups or campaigns that appeal to individuals' sense of altruism and desire to improve the health of their community.