Alex's Blog - Blog



Behavioral EconomicsAlexander SternIndependent StudyMrs. GravesJune 10, 2015What I Knew/What I Wanted to KnowIt is a field that influences all of us and every single one of us plays a part in it each and every day of our lives through the decisions we make. Behavioral Economics explores the driving force behind the conscious decisions we make and attempts to predict them. This is a newly emerging field that is still gaining traction throughout the economic world due to the number of people who are still skeptical of the discipline’s applicability. In order to learn more and better educate myself on this field, I posed a number of research questions that would guide my search. First, to make sure I had a concrete understanding of the field and its purposes, What is behavioral economics? From there, my understanding solidified, I went on to pose the question, How does behavioral economics compare to traditional economic practices and theories? Finally, to thoroughly explore a real world example of certain principles of behavioral economics being put to use I asked, How has a large, notable corporation applied principles of behavioral economics to further their own ventures and better serve their consumers too? The principles of traditional economics have guided economists through the treacherous forest that is the financial world for a long time now. It has given them a template to base everything they do off of. However, the new and emerging field of behavioral economics is based on its own principles. Some of which are similar to those of traditional economics and others are polar opposites. I wanted to explore some of these key similarities and differences. Once all of my research guiding questions had been posed, it was time to begin my search. My SearchMy search began with the discovery of my first source. It was an article from the Financial Times that talked about the new field and the ways in which it is gaining traction. This article was designed to give multiple perspectives on behavioral economics and distinguish it from other similar ones by pointing out certain key nuances. I found this source first while doing an exploratory post on the field. Many sources had trouble discerning between behavioral economics and psychology and often confused one for the other. What I enjoyed about this source is the fact that it pools a wide variety opinions from all across the spectrum in order to allow the reader to formulate their own opinion about the subject. Thus I was able to answer the first of my three questions thoroughly and completely. Then it was onto my next question. Dan Ariely is one of the foremost experts in the field of behavioral economics. He has written three books and has given many TED Talks on the subject. His perspective on the discipline is held in high regard. He has PhDs in both psychology and economics. He knows better than most how to discern traditional economic practices from those of behavioral economists. I immediately thought to find his take on this question. His answer was clear and definitive. Those who have previously interviewed him have aided me by already asking the right questions that everyone else is wondering about. Mr. Ariely also has a blog where he discusses behavioral economics and its principles. Here, I found exactly what I was looking for, a descriptive, concise post on the differences in the practices of traditional economics vs. those of behavioral economics.My third and final research question required me to spend the least amount of time looking for resources to use or articles to read. Immediately after posing this question as a part of my research, I recalled a conversation I had with my dad a few years ago. He had told me about how Target had collected massive amounts of data on the demographics of its customers and their shopping habits. I knew that this would be a perfect example for my research and that a comprehensive article about the situation would be more than enough to answer my question. Knowing exactly what I was looking for, I quickly found this article written by the New York Times, one of the most highly regarded news sources in our world today, explaining exact what Target did and how they did it. This article explores a real world usage of concepts of behavioral economics by a major corporation, Target, to better target their consumers and ultimately sell more of their products. Charles Duhigg, the author of the article, conducted several, detailed interviews with the man who lead the team that created the model for Target, Andrew Pole. Having quotes from Pole made understanding his whole process easy for a non-statistician like myself.The ResultsBehavioral Economists are coming in high demand these days. They have found a niche just about everywhere. This is a profession completely centered on efficiency and how get the most out while putting in the least. The job involves attempting to model human behavior and predict future choices made. Models are created for specific situations and pertain only those. There is no one unifying theory or model that represents the field as whole, careful calculations and predictions must be done and made on a case by case basis. These models are created not by studying human cognitive processes, but the actions that are made as a result of it. It has been deemed a “fashionable cross-breed of psychology and economics”1.This emerging field attempts to model human decision making processes like differential equations with many variables known as "made-for-purpose models". There is obviously no one unifying theory that can be used to predict all human behavior in all situations. While it falls mainly under the psychology portion of the topic, national governments are even creating Behavioral Insights Teams (BIT) that will be extremely effective at creating policies that will suit their people’s needs better than they have been able to in the past1.Back in 2002, a statistician named Andrew Pole was tasked with creating, for the Target Corporation, a method of determining if a woman was pregnant. If it could be done, Target could then directly target pregnant women with coupons for a variety of baby-related products. Pole and his team combed through data that Target had already acquired through the company’s baby registry. They found patterns related to specific products that women bought during different periods of their pregnancy. They then applied this model to all of their customers nationwide and were able to accurately predict whether or not a shopper was pregnant. Now a pregnant woman who may have only purchased her lotion from Target and her food from somewhere else would begin receiving and most likely using coupons to buy baby food from Target. This prompts her to begin buying a variety of products from Target for herself and her family that she otherwise wouldn’t have. Pole’s model was highly successful and Target went about sending pregnant women coupons for their products. This sort of analysis and modeling based on customer demographic and habit information is being used by many companies to further their interests and get more people to buy their products rather than that of their competitors2.Starting with the similarities, both types of economics attempt to gain a better understanding of humanity. Both are attempts to take past knowledge and use it to predict what people will do next or how they will react to certain scenarios. In order to make a smart investment, one must attempt to predict future behavior. Here is where the two approaches diverge as one takes a hard left and the other, a hard right. Traditional economics operates under the assumption that all people are rational beings. They will make only choices based on what is best for them and their situation and “calculate everything.” When it comes to the rationality of human beings, behavioral economics is the very antithesis of traditional economics. Behavioral economics dictates that people operate quite irrationally. People are not perfect. They have impulses and habits that they cannot control. Only a small percentage of the population will take the time and effort to take only calculated risks or attempt to do any cost-benefit analysis of a situation before diving right into it. We do not always learn from our past experiences, but continue to make the same mistakes over and over again. The irrationality of human behavior disallows the idea of creating one unifying theory to fit all and instead attempts to create models specific to only the certain situation it will be applied to3-5.References1 Harford Tim. Behavioral economics and public policy [Internet]. The Financial Times; 2014 Mar 21 [cited 2015 June 10]. Available from 2 Duhigg Charles. How companies learn your secrets [Internet]. The New York Times Magazine; 2012 Feb 16 [cited 2015 June 10]. Available from 3 Mutual Responsibility. Dan Ariely, prof. of behavioral economics, seeks to account for human nature [Internet]. [cited 2015 June 10]. Available from 4 Ariely Dan. Three questions on behavioral economics [Internet]. 2014 July 10 [cited 2015 June 10]. Available from 5 SuperScholar. Dan Ariely interview [Internet]. [cited 2015 June 10]. Available from ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download