15-08-2025
Introduction &
Overview
ED 323: Behavioural Economics
Instructor: Prof. Sunny Bhushan
What is Behavioural
Economics?
Today’s In-class Activity
lecture
Brief about the
course
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What Is Behavioral Economics?
Also know as ‘Psychology & Economics’.
Definition: Behavioural economics a field of academic research
that studies the joint influences of psychological and economic
factors on behaviour.
Blends economics with psychology, sociology, anthropology, and
neuroscience.
Objective: use insights from other fields to make economic
models more realistic and improve their predictive power.
Standard Economic Assumptions
What is ‘Homo Economicus’?
• A hypothetical person who behaves in exact accordance with
their rational self-interest.
Some assumptions of standard model (Rabin, 2002)
• Well-defined and stable preferences
• Bayesian information processor (process information optimally)
• Maximize expected utility (rationality criterion)
• Apply exponential discounting weighting current and future well-
being
• Narrow self-interest
• Functional/instrumental ‘taste’ for beliefs or information
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E mpiri cal Deviat ion s
&
Psychological Real is m
• Limited self-control
• Preference instability
• Cognitive and attention
constraints
• Present bias and
information limitations
Empirical
Deviations &
Psychological
Realism
Limited self-control: Fitness
enthusiast
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Empirical
Deviations &
Psychological
Realism
Limited self-control: New
Year’s resolutions
Default matter:
Opt-in Vs. Opt-out Empirical Deviations &
(Johnson & Goldstein 2003)
Psychological Realism
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Empirical • Selective attention test
Deviations & [Link]
Psychological watch?v=vJG698U2Mvo
Realism
The world is full of cognitive biases
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Finance — Why investors don’t always
behave rationally
• Concept: Loss aversion
People dislike losing more than they
enjoy winning.
Behavioural
• Example: During a stock market dip,
Economics many retail investors panic-sell at a
Across loss instead of holding for recovery,
even when fundamentals are strong.
Fields (Sumeet Lal et al.,2024)
• Applicability: Design better
investment communication and create
“default” investment plans that
prevent panic-driven losses.
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Law — How legal outcomes are shaped
by cognitive biases
• Concept: Framing effect
The way a choice is presented
changes the decision.
Behavioural • Example: When recommended
Economics punishments appear harsher
compared to the actual imposed
Across penalty, it may undermine the
effectiveness of sentencing in
Fields reducing re-offense. (Bushway, S. D. &
Owens, E. G., 2013)
• Applicability: Legal practitioners
can reduce bias by using neutral
framing and ensuring evidence
presentation is balanced.
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Public Policy — Nudging for better
choices
• Concept: Nudge theory
Small changes in choice
architecture can lead to better
decisions without restricting
Behavioural freedom.
Economics
• Example: Placing healthy foods at
Across eye level in school cafeterias
Fields increases selection without banning
junk food. (Hanks, A. S., Just, D. R., Smith, L. E.,
& Wansink, B., 2012)
• Applicability: Used in tax
compliance, energy conservation, and
social welfare program design.
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Marketing — Why consumers
buy what they don’t need?
• Concept: Anchoring bias
Initial numbers influence perception
of value.
Behavioural
Economics • Example: consumers rely on the
percentage discount as a mental
Across shortcut—especially when an item's
Fields original (anchor) price is high. (Darke,
P. R., Freedman, J. L., & Chaiken, S.,1995)
• Applicability: Helps marketers price
products strategically, but also
informs consumer protection policies.
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Health — Getting people to take
their medicine
• Concept: Present bias
People prioritize immediate
comfort over long-term benefit.
Behavioural
Economics • Example: Patients skip taking bitter-
tasting medication today because the
Across benefit (recovery) is in the future.
Fields (Silvy Cherian et al., 2018)
• Applicability: Behavioural
economists design reminder systems,
gamification, or incentives to
improve adherence.
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To summarize: -
Finance: Loss Aversion
investor panic-sell when market dips
Law: Framing Effect
Behavioural Jurors influenced by crime framing
Economics Public Policy: Nudging
healthy foods at eye level
Across
Fields Marketing: Anchoring Bias
Discount from high anchored price
Health: Present Bias
Skipping medicine for short-term comfort
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• Laissez-faire approach
• Educational interventions
• Taxes and bans
• Defaults and opt-in/opt-out
framing
• Commitment devices Policy Tools in
Behavioral
Economics
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Thank you!
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