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  • salomon raydan

behavioral economics

The human brain developed a decision-making system that allowed it to save energy and evolve. Without this system, this body would simply have consumed too much energy due to the enormous number of decisions it must make every second and it would not have developed in the way it did.

This system is called by the Nobel prize winner in economics Daniel Kahnema "fast system" because it does just that, "make quick and practically unconscious decisions." By using this fast system, our brain generates mental shortcuts. These shortcuts are called "Decision Heuristics" and what the researchers of the so-called "behavioral economics" have done is to discover that when our brain uses this system, "patterns" are formed that can be studied and understood.

Behavioral economics is a field of study that combines insights from psychology and economics to better understand human decision making. This interdisciplinary approach has provided valuable insight into why people make the decisions they do and how those decisions can be influenced by various factors.

One of the key ideas in behavioral economics is that people are not always rational when making decisions. Traditional economics assumes that people are rational actors who make decisions based on their own interest and a careful analysis of the available options. However, behavioral economics recognizes that people are often influenced by a variety of emotional, cognitive, and social factors that can affect their choices.

For example, behavioral economists have identified a number of psychological biases that can affect decision making. These include confirmation bias, in which people seek information that supports their existing beliefs, and framing effects, in which the way information is presented can influence people's choices.

Behavioral economists have also studied the impact of emotions on decision making. Research has shown that people are more likely to make risky decisions when feeling positive emotions and more likely to make conservative decisions when feeling negative emotions. This has important implications for the design of financial products and other decisions that involve risk.

In general, behavioral economics provides a valuable framework for understanding human decision making and its implications for economic policy. By considering the psychological and social factors that influence people's choices, policymakers can be helped to design policies that are more effective and better aligned with people's needs and preferences. This, in turn, can lead to more efficient and equitable outcomes for individuals and society as a whole.

In this sense, emotions can play an important role in financial and business decision-making. Research has shown that people often make financial decisions based on their emotional state, rather than relying solely on reason and logic. This can lead to impulsive or irrational decision-making, which can have negative consequences for a person's financial well-being.

For example, when people feel anxious or stressed, they are more likely to make impulsive financial decisions, such as overspending or selling investments at the wrong time. On the other hand, when people feel confident or optimistic, they are more likely to take financial risks that they might not otherwise consider.

It is important that people are aware of the role their emotions can play in making financial decisions and try to make these decisions based on reason and logic, rather than just their emotional state. This can help ensure that financial decisions are well-informed and considered, which can lead to better financial results.

Faced with the evidence left by research pointed out by behavioral economics, financial and business education programs must find ways for people to better understand how influential social and psycho-emotional factors are in decision making. Unfortunately, much of what has been done in this regard is marked, on the one hand, by a high level of complexity and specialization that prevents this knowledge from reaching the vast majority. And, on the other, due to the superficiality of pseudosciences centered on a voluntarist vision that contribute little so that this new branch of the economy can generate the desired benefits.

An example that we frequently use in our financial education workshops to show the relationship between money and emotions is to show a banknote of the same denomination, for example 100 USD. We immediately ask people if those two bills have the same value.

Naturally, people say that they do have the same value, but when we tell them that one of the bills was found by chance on the floor and the other one was earned by working 8 hours under the sun, using a pick and a shovel, they immediately person understand that money is not an objective value, but that it is related to psychological conditions that we must study.

At FUNDEFIR we have dedicated a few years to learning about these experimental-based principles and we have developed simple training instruments, aimed especially at our traditional population, basically made up of vulnerable communities and small entrepreneurs.

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