Behavioural Economics Explained
Behavioural Economics and Nudge Theory
An introduction to Behavioural Economics and why it is used in modern-day market research.
What is Behavioural Economics
Behavioural Economics, sometimes referred to as BE, is an important discipline for market research companies and clients alike, exploring why people sometimes make irrational decisions and why their behaviour does not follow the predictions of economic models. Some of the best-known individuals in the study of behavioural economics are Nobel laureates Gary Becker, Herbert Simon, Daniel Kahneman and George Akerlof.
Behavioural Economics in real life
Behavioural economics is about understanding how people actually make decisions in real life, not how we’re supposed to on paper. In theory, we should always act logically and make the best choices — but in reality, we’re influenced by emotions, habits, social pressure, and small details like how options are presented.
It helps explain everyday behaviour, like why we put off decisions, stick with the default option, or choose something just because others are doing it. By recognising these patterns, businesses and marketers can design products, messages, and experiences that feel more natural and intuitive — because they work with human behaviour rather than against it.
Behavioural economics and behavioural research help improve the quality of insights that research companies provide, using techniques like choice experiments, implicit testing, and real-world simulations that reveal what people actually do — not just what they say. Overcoming the Say-Do gap helps uncover biases such as loss aversion and present bias that traditional research might miss.
For a brief introduction, watch this excellent video on Behavioural Economics from CrashCourse:
Some recommended reading on the subject of Behavioural Economics includes;
- Influence: The Psychology of Persuasion
- Nudge: Improving Decisions about Health, Wealth, and Happiness
- Think Twice: Harnessing the Power of Counterintuition
- Predictably Irrational: The Hidden Forces that Shape our Decisions
- Thinking Fast and Slow
Behavioural Economics Explains It. Nudges Make It Happen
Behavioural economics is the big picture — it explains how and why people make decisions in real life, including the biases, habits, and shortcuts that influence us. A nudge is a practical application of that knowledge — a small change in how choices are presented that gently steers people toward a better decision, without removing their freedom to choose.
For example, behavioural economics tells us that people tend to stick with default options. A nudge uses that insight by automatically enrolling employees into a pension scheme, while still allowing them to opt out. In simple terms, behavioural economics provides the understanding, and nudges are one of the tools used to put that understanding into action.
Perhaps some of the most important theories and models from a market research user’s perspective are:
10 of the most influential nudges and heuristics in behavioural economics
1. Anchoring
Anchoring is a particular form of priming effect in which initial exposure to a number serves as a reference point and influences subsequent judgments of value. The process usually occurs without our awareness (Tversky & Kahneman, 1974), and sometimes it occurs when people’s price perceptions are influenced by reference points. (Often the first thing they hear or see).
2. Availability heuristic
Availability is a heuristic whereby people judge the likelihood of an event based on how easily an example, instance, or case comes to mind.
3. Bounded rationality
Rationality is bounded because there are limits to our thinking capacity, available information, and time (Simon, 1982). Bounded rationality is similar to the social-psychological concept describing people as “cognitive misers” (Fiske & Taylor, 1991) and represents a fundamental idea in human psychology that underlies behavioural economics.
4. Framing effect
Choices can be worded to highlight the positive or negative aspects of the same decision, thereby changing their relative attractiveness. This technique was part of Tversky and Kahneman’s development of prospect theory, which framed gambles in terms of losses or gains, and is also vital for highlighting how you present ideas in research.
5. Halo effect
This concept is well known to marketers and has been developed in social psychology, and refers to the finding that a global evaluation of a person sometimes influences people’s perception of that person’s other unrelated attributes.
6. Social proof
Social proof is when people look to others’ behaviour to guide their own decisions, assuming popular choices signal the correct, safe, or most desirable option.
7. Inequity aversion
Human resistance to inequitable outcomes is known as ‘inequity aversion’, which occurs when people prefer fairness and resist inequalities. In some instances, inequity aversion is disadvantageous, as people are willing to forgo a gain to prevent another person from receiving a superior reward.
8. Loss aversion
Loss aversion is an important Behavioural Economics concept associated with prospect theory and is encapsulated in the expression “losses loom larger than gains”. It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining, and since people are more willing to take risks to avoid a loss, loss aversion can explain differences in risk-seeking versus aversion. In many ways, much of marketing exploits Fear and Loss aversion to good effect.
9. Priming
Priming is a technique and process applied in psychology that engages people in a task or exposes them to stimuli. The prime consists of meanings (e.g. words) that activate associated memories (schema, stereotypes, attitudes, etc.). This process may then influence people’s performance on a subsequent task. In qualitative market research (e.g. focus groups), it is often important not to prime unless a particular state/frame of mind is required.
10. Confirmation bias
If you have ever listened to focus groups, you will have come across confirmation bias. Confirmation bias occurs when people seek out or evaluate information in ways that fit their existing thinking and preconceptions.
Related topics include: System 1 thinking and neuromarketing, and related books include: The Choice Factory, Misbehaving, Predictably Irrational and Decoded, to name just a few.
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