How has behavioral economics changed your perspective?

On our twitter feed, we asked if there are any behavioral economic concepts that have changed your perspective on your decision making. Here is one example that comes to mind.

The concept of mental accounting says that people perceive and code different events as they make different decisions. A well-known scenario involves a calculator and a laptop computer. Consider a calculator that sells for $50 at store A. Ask yourself how far you’d be willing to walk (in order to exclude issues about gas costs) to get that same calculator for $20 less at store B. Say it’s 20 minutes. Now, you are also in the market for a laptop computer. You are looking at a model that costs $1,250. Would you walk 20 minutes if you knew a store that sold it for $1,230? Many so no. $20 on a $50 purchase is significant (40 percent), but $20 on a $1,250 purchase is peanuts (1.6 percent). But, hey, saving $20 is saving $20, regardless of how big a ticket the item is.

If you think this way all the time about big and small purchases, eventually you’ll have changed your perspective.

So how has a behavioral economics concept affected your perspective?

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  • John Ware

    Love the blog; love the book. As a qualitative analyst (Six Sigma, Lean, etc.), I have drastically altered my view of probability and statistics, esp. as it applies to business risk management. Notwithstanding the fact that black swans can come at any time – usually in a form we can’t predict, both good and bad – the “100 year floods” in business seem to be happening every 100 days or so.

    My take on all this is that we cannot always predict how people will act and react in any business environment. It is NOT always in their best interest, as economists and psychologists would have us believe. In fact, I’ll go so far to say that people in business – from the CEO all the way down – somehow behave in ways that is just plain head-scratchingly questionable.

    So this has altered the way I approach risk management in business: not always (if ever) quantifiable, and very little qualifiable. All you can do is know that something is going to happen, and mitigate the bad effects, and magnify the good.

  • Nanny

    It’s inspired me to become a nanny

  • Julietta Strauss

    It’s changed the way I view sunk costs. Yesterday, for instance, I paid 2 bucks for a drink brand I’d never had before and decided to try. I didn’t really care for the taste of it, it had virtually no nutritional value, and I wasn’t exceptionally thirsty. There was no one around to give it to, and it wasn’t awful – and of course I’d just paid for it – so I hesitated to toss it. But I asked myself: Would I drink any more of this if it was available for free? I was quite sure I wouldn’t, and so I knew the logical thing to do would be to throw it out. So I did, and instead of regretting the purchase, I was able to focus on what a logical decision I’d just made, knowing that many people (including my past self) would’ve needlessly consumed the extra calories and endured the mild arduousness of drinking a beverage they didn’t care for.

  • Julietta Strauss

    Other ways I incorporate behavioral economics:
    1) I place my alarm clock across the room so that I have to get out of bed to turn it off
    2) When I buy a pack of candies I like, I have trouble controlling myself to not eat it all too fast. It’s both better for me and more enjoyable when I spread out the treats instead of eating them all at once. So, I either have my partner hide some of it for me and ration it, or I take a few and throw the rest of my back into the recesses of my hard-to-reach storage shelves where they’ll take some effort to retrieve.
    3) I ignore extended warranty offers and any sort of insurance that’s not for catastrophic scenarios
    4) I set aside savings first, not last, and make them hard to access
    5) I’ve used StickK.com to make behavioral contracts and plan to use it more in the future.