Have you ever gotten an electricity bill that compares your consumption of electricity to your neighbors? You look at the bar graphs and see that you consume about 2 terawatt-hours (TWh) more than your neighbors. Feeling bad for consuming so much more energy than your neighbors then prompts you to create a plan to save electricity so the next month your bar graph will be lower than your neighbors. Or have you ever driven down a road slightly above the speed limit to find a posted speed limit sign with a screen calculating your speed in red? Then when you see those flashing red numbers you immediately take your foot off the gas to slow down until that screen is no longer flashing red. These are examples of behavioral economics.Behavioral economics is a theory coined by Richard Thaler. Thaler states, “Behavioral Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications.” In the above example of a screen flashing red for the driver to slow down, that interaction is called a nudge. This term was popularized by Thaler and Cass Sunstein in their book, Nudge: Improving Decisions about Health, Wealth, and Happiness, a nudge is described as “any small feature of the environment that attracts people’s attention and alters their behavior but does so in a way that doesn’t compel.”There are two core principles behind the driving force of behavioral economics:
- Recognize that humans do not always behave rationally when making decisions. In our two examples above, the need to save electricity prompted the utility company to send comparison letters. The need for reducing speeding cause the local law enforcement officers to post speed trackers
- Enable people to make better decisions for themselves by changing the context in which they make choices. Going back to the electricity example above, when the utility customer receives that comparison letter, they are being nudged to reduce electricity consumption. In our driving example, when the screen is flashing red, the driver can choose to slow down if they’ve been nudged to make the safer choice.
