Behavioural economics is an essential concept in Economics,
it incorporates psychology to better understand the behaviour of an individual.
In a perfect world, individuals make precise decisions which deliver them with
the utmost benefit and satisfaction. However, sometimes, irrational decisions
can be made and therefore, behavioural economics looks to explore why this is
the case. It tries to understand why behaviour sometimes does not correlate
with economic models and theories. Individuals make a variety of decisions
throughout the day. Behavioural economics looks to explore the reasoning behind
why an individual decides to take one route instead of another. Daniel Kahneman
and Amos Tversky, two renown psychologists, in 1979 published a journal
entitled “Prospect Theory” analysing how an individual might frame economic
consequences as gains and losses and how this has an effect on the decision
making of a person. Before this, in the eighteenth century, Adam Smith noted
that human psychology is imperfect and thus imperfections may have a direct
impact on the economic decisions of an individual. This was the first real
acknowledgement of the theory.
Professer Thaler, an
American economist, was recently awarded the Nobel Prize in Economic Sciences
for a concept called The Nudge Theory. This is a concept helping people understand and monitor how others may
think or make decisions as well as helping individuals to improve their thinking
and decision making skills. The nudge theory is apprehensive towards the design
of choices mainly. This has an impact on the decisions an individual may make.
The theory proposes that the design of choices should be based on the way individuals
actually think, which is considered to be irrationality, rather than how
authority traditional belive people think and decide which is assumed to be
logical and rational.
Life decisions such as
deciding on how much to invest on education may be considered to be one of the
most important economic decisions individuals can make during their lives.
Education is crucial as it allows an individual to develop a range of skills
improving the chance of gaining higher income. Yet, according to research and studies, many of the decisions
individual make have seemed bewildering. A study indicates how a sizeable
portion of students drop out from educations when returns seem to be maximum (Oreopoulos,
2007; Heckman et al, 2006). Other studies have indicated a correlation between girls
having a tendency to shy away from competitive settings and underperforming on
maths tests despite knowing the future returns to be significant (Niederle and Vesterlund, 2010; Joensen and
Therefore, this indicates
how irrational choices are made despite knowing the significant returns.
Despite knowing the importance of education individuals may continue to make