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Behavioural economics

Behavioural economics studies how people make choices using insights from psychology and economics.

Orthodox economics Behavioural economics
Assumes that people can be treated as selfish, rational and independent agents Shows that people are often altruistic, not fully rational and not independent but tend to reproduce their peers’ choices

Application

Behavioural economics may be applied to any policy where individuals' response to it helps determine its effectiveness.

People's behaviour is often "short-sighted" when it comes to sustainable consumption or health, for example. More often than not, people tend to downplay the future benefits of today's good habits.

Behavioural insights could be applied to design better labelling and understand information processing.

Behavioural economics and policy

Understanding the reasons underpinning people's behaviour is essential for policy-making.

Education or information campaigns may help if people's behaviour is caused by lack of knowledge or information.

If people's choices result from behavioural traits, taking biases into account when designing policy may be more effective e.g.

  • Default bias - letting the default rule dictate our decision;
  • Myopia - choosing a small reward today over a larger one later;
  • Loss aversion - preference to avoid loss than to acquire gains;
  • Excessive confidence, etc.

DG Health & Consumers and behavioural economics

We are incorporating behavioural economics in our policy work:

  • Evidence in behavioural literature for the inclusion of a ban on pre-checked boxes in the proposal for the Consumer Rights Directive (art. 31.3).
  • Conducted the first behavioural study on consumers’ decision-making in retail investment services showing that simpler and standardised product information significantly improves investors’ decisions.
  • Establishing a procedure to analyse behavioural issues related to policy-makers' decisions and test ex-ante the effectiveness of policy interventions.