Economists' suggestions: how they influence people and social behavior
The Business of Behavioral Economics
Behavioral Economics is nowadays becoming one of the most important doctrines regarding policy making, and both governments and ﬁrms use it, but each for different aims: the ﬁrst indeed applies it to improve the human conditions, while the second instead especially to take economic advantages. Previously it was mentioned that consumers are not always rational in maximizing utility functions or, even more drastically, they choose on the base of feelings and emotions, so their decisions are not always in their own best interests, at least from utilitarian point of view. Government, on its side, has the task to protect people from their biases and with the use of Behavioral Economics it has developed subtle approaches that can eﬀectively steer people toward desired outcomes, improving their expected health and happiness.
The idea is to push people to act in a certain way neither with the use of force nor through the promulgation and enforcement of legal edicts; instead, people are inﬂuenced by paternalistic practices that however let them still free to make their own choices. As already said, Behavioral Economics is also useful to understand how individuals make choices: it is important to consider in particular the “Prospect Theory”, that examines probabilistic alternatives where risk is involved. According to this theory, losses and gains are valued diﬀerently, the result being that individuals make decisions based on the perceived gains instead of on the perceived losses; “loss aversion” is an important concept when talking about irrational choices: it means that people usually feel more pain when losing something that they feel gratiﬁcation when gaining something of equal value; consequently people are more likely to take a risk when something is referred to as an acquisition.
This theory, developed by the psychologists Daniel Kahneman and Amos Tversky, explains that losses cause greater emotional impact on an individual than an equivalent amount of gain does, and this concept, called ‘’loss aversion”, is important in the study of markets because this diﬀerent balance in thinking can jeopardize the regular outcomes of transactions. To better understand the problem, just think at the real estate market and the willingness of people to buy and sell houses: almost everyone, when buying a house, decide a budget to pay and want to spend as few as possible; when selling instead their own house, every amount that other people are oﬀering seems a loss in comparison of having the property, even if the amount is the same as the one they spent in the past to buy it.
Behavioral Economists study the implication of this kind of theories to have a better outlook on policy determination, since loss aversion is seen as a natural framework that can generate pronounced asymmetries. This may refer, for example, to the paradox of the lobbying expenditures, due to which individuals place a larger welfare weight on avoiding the loss of a given amount of income than on the acquisition of a gain of the same amount: it is common to expect that interest groups in a better position to ﬁnance lobbying expenditure should receive most of the government support, because they actually produce the real value to the economy, but, surprisingly, the most of the support goes to declining sectors. This may happen because government has an “identity bias”, that means that it cares more about citizens in trouble, and also because politicians place a large weight on reductions than on increases in income.
Then, another explanation is that the government in reality doesn’t choose directly declining ﬁrms but these ﬁrms, that lobby harder to appropriate rents, without attracting new entry of competitors in the market, pick government policies that, by default, are born to redistribute income and conﬁne shocks. In this way, worse-oﬀ industries have larger incentives to become politically organized and consequently, due to the fact that they appear to be much more successful when receiving government support, loss aversion is seen as being more important for political economy issues. Returning to the subject of human fallibility, economists have to consider temptation as an important factor in determining the causes of people decisions: temptations exist and people take steps to overcome them and to choose in the best possible way.
It can be explained using the “hot-cold empathy gap” a ‘’hot state” happens when people feel excitement and an eﬀect of arousal, while when in a ‘’cold state” people do not appreciate how much desires and behavior can be altered. People are aware of the weaknesses of their mind and try to solve the ﬁght between their instinct and their rationality, by using diﬀerent means of their own but also by following government instructions. Laws explain the coercive power of the state, but also incentives and suggestions are fundamental in ensuring that people act in ways that meet the expectations of the group. Government indeed works also with the right and moral obligation to step in and protect people from themselves .
Regulations and governement imposed self-control strategies can be applied in practical issues, for example in extreme topics such as drugs use or prostitution, but broadly speaking whenever citizens’ interests are jeopardized or simply when people need to “correct” some of their habits to be more productive or eﬃcient. At the beginning of this dissertation, it has been said that people usually get inﬂuenced by others and evidence of this can be found in almost every ﬁeld of human life, sometimes endangering people’s rational choices; when social inﬂuences create false or biased beliefs, third-part intervention can be deemed necessary. It is curious to see that the way in which this intervention is carried out is exactly through social inﬂuencing: people are by deﬁnitions “social animals” and what they are best at is compare their behavior to the behavior of the others, copying and learning what the others do.
One explanatory example of this “herd mentality” is given by the psychologist Robert B. Cialdini with an experiment regarding how people approach energy conservation. With a survey he asked people to rate from most important to least important four factors that could push them to save energy: money savings, protection of the environment, a general beneﬁt for society or the fact that a lot of people do it. The result of the phone survey was that the most chosen reason was “protection of the environment”; to complete the experiment he also went house-to-house hanging on each doorknob a placard encouraging residents to save energy. Those placards were not identical: there were four types with diﬀerent advertising phrases, one for each of the four diﬀerent factors, such as ‘Protect the environment by conserving energy’ or ‘Join your neighbors in conserving energy’.
Cialdini observed that people changed their energy consumptions in diﬀerent measures depending on which placard they had received: the clear winner was the “Join your neighbors”, alias the herd-mentality. The conclusion of the experiment is that people can be easily inﬂuenced and persuaded to do “the right thing” by convincing them that most people do the same With this in mind, accepting the idea that people get easily carried away, the practice of “nudging” was born: it is not an imposition from the government but it is a way in which people can be steered toward better choices according to their preferences, with no limitations or coercion.
Literally, “to nudge” means to touch or push something gently, especially with the elbow, to get someone’s attention; in the economic framework it suggests the idea according to which consumer behavior can be inﬂuenced by small suggestions and positive reinforcements. The easiest example of nudging is the arrangement of food in supermarkets in a certain way rather than in another: items at eye level catch the attention of consumers, that seem to prefer those instead of food that they can’t ﬁnd immediately; people aren’t forced to buy a speciﬁc product, they can choose and select the one they prefer, but they are more likely to follow the general rule of location.
People may need nudges for decisions that are diﬃcult to take or when they don’t fully understand the situation thus risking to miss taking the best choice. People in charge of deciding when to intervene with nudges are called “choice architects” and they are clearly press agents. […]
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