What is Behavioral Economics?
Logically wrong.
Behavioral economics is an academic field combining the departments of economics and psychology, providing useful implementation of studies done in behavioral science, in order to understand better the subject of decision-making at the economic field, and how it affects the economy: prices, investments yield, resource allocation etc.
The discipline deals mainly in rationalism or irrationality of market agents and public trends for decisions making.
Models of behavioral economics combine insights from the field of psychology with the theory of neo-classic economic.
Ok, that was a bit long and confusing.
So what is behavioral economics is all about?
It means that economics is not something you can measure in logical terms. The main key factor for eco-changes is humans, and those creatures as you already know, aren’t that rational.
If you study the cognitive and emotional factors, on a certain group, you may find explanations for some of the groups economic decisions.
One of the most important issues are the effect on market decisions and public choice.
Why we need it?
because we humans act irrational!
- Why gambles in casino are keep gambling although they know they’re gonna lost all their money?
- Why people always say they need to save money for retirement, start exercise, stop smoking, keep on balanced nutrition- and still do nothing?
- Why victims, who have been treated improperly, demand revenge, although it damages their interests?
All those (and many more – I can go for hours), harms the ‘economic person’ model, which has been the base of the classic and new-classic economics for hundreds of years.
The ‘economic person’ take rational and logical decisions, motivated by personal interests, after considering the cost-benefit and try to maximize his profits.
The ‘economic person’ is a wise, reasonable, selfish and analytic person, showing perfect self-control, and act in order to achieve his future goals. He is not moved aside by his mental or physical states.
This man is the base of all the economics theories and models for the past hundred years.
There’s one problem – He does not exists!
While dealing with real people, you find out different types of irrational behaviors.
Some actually damages the person himself, some showing altruist behavior and far from the one’s interests.
The bottom line: psychology takes huge part on the process of decisions making, revealing the conflict between logics and passions.
People, like animals, have basic tension between provide themselves immediate satisfactions, and patiently waiting for future satisfactions.
They want it here and now, and also wish to think about tomorrow.
In general, people act irrational when they are underestimating in the value of the future.
They (humans) spend too much value and effort for things we want to do right now, on the expanse of the other good thing we can do in the future.
And still- marketing is everything!
It has been shown that the wisdom of marketing is the base for motivating the mass and the crowd to change their way of thinking and choose one product over the others.
Marketing is a key factor in which the economic person reaches all the irrational ones, and affects them to do what is right, diverse from the immediate satisfaction desired.
Marketing, by the orientation of behavioral economics, must take into consideration the population it’s aiming too.
Geo-location, age, education, standards, latest trends and culture are one of the many things it should consider.
Is it also relevant for the CEO Game? Of Course!
One of the most important roles the CEO need to be very close to is the Marketing department. It must be creative, smart, and targeted.
The difference between become the hottest trend and be another shelf product as many others, is by taking the public heuristics into consideration.
Learn the area, learn your potential consumers, feel the market and think how to become outstanding (original rather than normal).
Develop a marketing plan and sale your products as they are the best thing the community could ask for, be aggressive but gentle, think big and give credit for your buyers.
And the most important, always remember that humans are irrational. You can’t predict the future.
Cheer’s!
The CEO Game.
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