Psychology and Economics Have a lot More in Common than Most People Realize.

What is Behavioral Economics?
Part of the beauty of human nature is the fact that we make bad decisions. Quite frankly, a lot of decisions that we make are irrational whether they have consequences or not. Because of this, we cannot quantify our lives by directly applying them to economic decisions. The creation of behavioral economics stems from this understanding, and it has led to the combination of psychology and economics.

There are key questions that must be answered in this field. From the basics in your everyday life, like buying something from the grocery store, to purchasing a new home. By thoroughly studying human emotions and their environments, we can contrast economic laws and find the outliers. Let’s take a look at an example that relates to your everyday life, such as purchasing a candy bar. It is true that some people may go to the store just to buy a candy bar, but why do you think that candy is always at the cash register?

Examples of Behavioral Economics
Candy bars are filled with sugar and harmful chemicals that have no benefit other than immediate satisfaction. However, with their colorful wrappers and cheap price, it makes sense why it is so easy to purchase one. This is a prime example of how impulsivity leads to the purchase of a product, but it is important to look at the fact that many people will likely only buy one bar of candy in this scenario due to the fact that they know it is a bad decision.

We can also look at big purchases such as purchasing a new home. Many consider this the biggest investment in your life, which is already bringing behavioral economics into your life. Of course, this is an extremely important purchase that will cost a lot of money, but it is also filled with emotions, self-interest, and will power. We see houses on the market for months because owners want to sell for far too much money, leaving money on the table since a home on the market is not an asset that will appreciate over time. In this case, the owner’s self interest and will power is far too high for them to actually sell their home, which could hurt them in the long run. On the other hand, we see real estate development companies find cheap deals on homes in which owners are eager to sell. These companies can take advantage of sellers by making the selling process easier, which costs them money but saves them time. No matter how big or small the purchase is, your emotions and intuition will never be separated from you.

How Does Behavioral Economics Contribute to Society as a Whole?
In a world where our economy relies on the benefit of others, it is important to understand the sub fields involved in the anatomy of economics. To the rest of the world, the United States is seen as the economic superpower. In terms of economic output, Americans exceed their “expectations” by generating more than 20 percent of the world’s total income while only being 5 percent of the population. In this economic output, almost 80 percent of it comes from highly developed services, according to Statista.com. When speaking about services as an economic product, they are tasks performed for the benefit of the consumer. Analyzing how to conduct these tasks is performed by understanding the psychology behind consumer wants and needs. Product development goes much further than just the numbers and many companies can take “advantage” of the impulsive buyer by blasting ads into their faces. While this may seem like a dirty corporate scheme, it does contribute to our nation’s economic strength.

Major changes in the world economy such as the COVID-19 outbreak and supply chain issues have also shifted the economic state of the world. Looking at behavioral economics offers us insight into how these affect our everyday lives. The resulting products of these issues, such as rising interest rates, unemployment, and inflation, affect the psychology of people and economic growth. For example, when purchasing a house, people are less likely to spend a major portion of their income knowing that a high interest rate loan will cost them more money in the long run. However, this must be weighed against the fact that the real estate market shot up during this time which may induce a homeowner to sell their home.

Going further than just the financial structure of our country, behavioral economics plays a crucial role in the distribution of power in our country. When it comes to important tasks such as voting, decision science is an important factor in preparing for the future. Every citizen wants our country to succeed; however, the ways we allocate our resources is what forms disagreement in the country. Democrats tend to favor social spending and welfare, while Republicans tend to favor tax cuts and less government spending. Dealing with the allocation of scarce resources is what economics is about, and the science behind what our country favors relies heavily on current events. Recent trends have put social issues and welfare spending at the center of debate in politics, and many middle-ground voters may side with liberal ideology due to the fact that the last four years may have had a negative impact on the financial state. However, the media blasting information about social issues may turn off these voters who will then side with a conservative belief system, as they may believe that it is time to look towards the future of the country and focus on how to prevent lasting effects of a recession.

What is your place in the economy?
Everyone certainly plays a factor in the growth of our economy. You will never be able to remove your self-interest and emotions from economic decisions in your life, and that is not a negative thing. The circulation of behavioral economics goes both ways; companies will benefit from your impulsivity, while you can also take advantage of understanding the science behind decision making to make optimal choices. Whether it is buying a home, driving to the store, or asking someone to marry you, behavioral economics will always have a role.