Behavioural economics: Seven Principles for Policy Makers

Standard neoclassical economic analysis assumes that humans are rational and behave in a way to maximise their individual self-interest. While this ‘rational man’ assumption yields a powerful tool for analysis, it has many shortfalls that can lead to unrealistic economic analysis and policy-making. This Briefing distils many concepts from behavioural economics and psychology down to seven key principles, which highlight the main shortfalls in the neoclassical model of human behaviour.


The seven principles:

1.Other people’s behaviour matters: people do many things by observing others and copying; people are encouraged to continue to do things when they feel other people approve of their behaviour.

2.Habits are important: people do many things without consciously thinking about them. These habits are hard to change – even though people might want to change their behaviour, it is not easy for them.

3.People are motivated to ‘do the right thing’: there are cases where money is de-motivating as it undermines people’s intrinsic motivation, for example, you would quickly stop inviting friends to dinner if they insisted on paying you.

4.People’s self-expectations influence how they behave: they want their actions to be in line with their values and their commitments.

5.People are loss-averse and hang on to what they consider ‘theirs’.

6.People are bad at computation when making decisions: they put undue weight on recent events and too little on far-off ones; they cannot calculate probabilities well and worry too much about unlikely events; and they are strongly influenced by how the problem/information is presented to them.

7.People need to feel involved and effective to make a change: just giving people the incentives and information is not necessarily enough.
 
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