Behavioural economics studies how people make choices using insights from psychology and economics. The difference between traditional economics and behavioural economics can be summed up as follows:
Traditional economics assumes that people can be treated as selfish, rational and independent agents.
Behavioural economics shows that people are often altruistic, not fully rational and not independent but tend to reproduce their peers’ choices.
Watch our video on behavioural science
Application in policy-making
Understanding the reasons behind people's behaviour is essential for policy-making. Behavioural insights 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 certain issues, for example sustainable consumption or health. They tend to downplay the future benefits of today's good habits. Application of behavioural insights could help understand how consumers process information.
In cases where people's behaviour is caused by lack of knowledge or information, education or information campaigns may be helpful. However, if people's choices result from behavioural traits, taking biases into account when designing policy may be more effective, for example:
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 is incorporating behavioural research in its policy-making:
Evidence in behavioural literature informed 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.
- Established a procedure for ex-ante behavioural testing of the effectiveness of policy interventions.