Behavioural Economics ─ A Very Short Introduction

Traditionally economists have based their economic predictions on the assumption that humans are super-rational creatures, using the information we are given efficiently and generally making selfish decisions that work well for us as individuals. Economists also assume that we're doing the very best we can possibly do--not only for today, but over our whole lifetimes too. But increasingly the study of behavioral economics is revealing that our lives are not that simple. Instead, our decisions are complicated by our own psychology. Each of us makes mistakes every day. We don't always know what's best for us and, even if we do, we might not have the self-control to deliver on our best intentions. We struggle to stay on diets, to get enough exercise and to manage our money. We misjudge risky situations. We are prone to herding: sometimes peer pressure leads us blindly to copy others around us; other times copying others helps us to learn quickly about new, unfamiliar situations.

This Very Short Introduction explores the reasons why we make irrational decisions; how we decide quickly; why we make mistakes in risky situations; our tendency to procrastination; and how we are affected by social influences, personality, mood and emotions. The implications of understanding the rationale for our own financial behavior are huge. Behavioral economics could help policy-makers to understand the people behind their policies, enabling them to design more effective policies, while at the same time we could find ourselves assaulted by increasingly savvy marketing. Michelle Baddeley concludes by looking forward, to see what the future of behavioral economics holds for us.

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Michelle Baddeley is Professor in Economics and Finance at the Bartlett Faculty of the Built Environment, University College London (UCL), and before that was Director of Studies in Economics, Gonville & Caius College/Faculty of Economics, University of Cambridge. She has an active interest in public policy and is a member of the Hazardous Substances Advisory Committee (convened by the Department for Environment, Food and Rural Affairs), and an Associate Fellow with the Centre for Science and Policy (CSaP), based at the University of Cambridge. She was a member of the Blackett Review Expert Panel: FinTech Futures 2014-15, led by Professor Sir Mark Walport, UK Government Chief Scientific Adviser. Her books include Behavioural Economics and Finance (Routledge, 2012), and Running Regressions: A practical guide to quantitative research in economics, finance and development studies, (CUP 2009), with Diana Barrowclough.