hi everybody behavioral economists would argue that there are some times where consumers don't make rational decisions on their own utility maximizing decisions based on the information around them purely on their own behavioral economies will argue that sometimes emotional social and psychological factors can influence decision making which can prevent rationality and utility maximization taking place those factors are known as cognitive biases to influence decision making let's have a look at what some of those biases are and how they can influence decision making well the first one is price anchoring where a value is imprinted in our mind as a reference point to compare prices to so a good example of this is with shops and supermarkets having recommended retail prices on price labeling that creates an anchor in our mind and we compare the actual price which is often lower to that recommended retail price the fact that the real price is lower than the r P Price the anchored price in our heads makes us think that we're getting a great deal which is not necessarily the case at all the same argument we can use with house prices social norms this is when our decisions are influenced by rules that Society is dictated for example tipping in restaurants because we like the service we like the environment we like the experience right so we tip our restaurants that's become a social Norm yet we don't do so when we go for a dinner party at our friend's house or our or our relative's house even though we might have a just as enjoyable an experience as we had in the restaurant you may be even better but we don't give a monetary tip do we that's a social Norm instead we tend to give a gift a bottle of wine or or a box of chocolates or something like that social norms the way in which we um the way in which we judge those who have been caught drink driving or those who have been caught not wearing their seatbelt you can argue that these are all social norms as well availability buyers this is when we make decisions based on how easy it is for us to conjure up examples even if those examples completely inflate the real probability of that thing actually happening so a good example of this is going swimming in Australian Seas now we might decide not to go swimming in Australian seas because we POS we perceive such a high risk of a shark attack why do we perceive such a high risk because examples of shark attacks come to us so easily every time there is one shark attack it features on the news we hear about it and therefore it's so easy for us to come up with an example of a shark attack of that risk whereas in reality the probability of a shark attack taking place in Australian Seas is very very very low but because the examples come to our mind so easy we over inflate that risk and therefore we are not willing to to swim in the Seas another example is of smoking you know if we have an elderly relative that's been smoking their entire life and is very healthy at the age of 85 or 90 years old that example comes to our mind very easily and for that reason we think oh actually smoking isn't that risky I can smoke my whole life and be fine just like my elderly relative is right now well actually that disregards completely all the evidence out there which suggests that smoking a huge amount today is likely to lead to premature death framing framing is the idea of us being influenced by the way in which information is presented to us so for example if low fat is advertised heavily on a product or low cholesterol or low sugar if that's been advertised heavily and and information is framed in a certain way supposedly we are more likely to consume it given that we are influenced by the way in which information is presented you have the way in which for example um a questions are framed to us may again influence our answers to those questions loss aversion loss aversion is the idea that we don't like to give things up we don't like to lose things that we have a value towards so a good example is is money you know we have a real attachment towards money and instead of investing it maybe into something that can give us more money or give us more utility we don't want to take that risk because we don't like the idea of maybe losing that money even if the chance of losing it is very low and the transfer gain is much higher the fact that we have something and we don't want to give it up is loss aversion we don't want to take a risk of losing it and that leads to something called the endowment effect very much link the endowment effect is attaching too much monetary value value to something you have compared to something else that you could gain yeah even if whatever you could gain if there's no risk to it whatsoever if it's worth the same as what you had you're less willing to engage in that transaction because you value what you have so much you don't want to give it up right that's the endowment effect linked very much to loss aversion we don't like the idea of losing something herd Behavior this is when basically we jump on the bandwagon we do whatever we do we make that decision because other people around us have made that same decision if for example going to a restaurant and you make your order based on what your friends are ordering more significantly though if we look at the financial markets right we look at Bull markets where lots of people are investing in a certain stock or Equity or commodity or currency whatever it might be another investor makes the same decision to buy that stock where Equity why because everybody else is doing it that can cause a bubble and that can lead to a huge crash that's hurting Behavior Choice architecture this is the idea that our decisions are influenced based on the location or placement of something right all the way which again information is presented to us or choices are presented to us so a good example of this is the location of salad bars in restaurants if those salad bars are located in a certain location maybe at the front of the restaurant maybe in the middle of the restaurant supposedly who are more likely to then consume salad where hand sanitizers you know wall hand sanitizers are placed again could well uh be positioned whether we are more likely to actually consume that that hand sanitizer um maybe it's the idea of you know traffic cones and so traffic cones are placed in certain locations that might stop his speeding right um that you could argue is Choice architecture maybe it's the location of of stairs in relation to escalators or lifts you know so stairs the position at the front of the building um whereby escalators or lifts are positioned at the back that might influence us to use the stairs more and therefore promote healthy exercise as opposed to using the lift so here are some examples of cognitive biases where social emotional and psychological factors can influence decision making as opposed to Pure rational thought but behavioral economics can maybe um allow us to understand other situations where traditional economics can maybe let us down for example altruism altruism is the idea of kindness or selflessness um where consumers or individuals don't expect anything back in return for that kindness or selfless activity so one good example is territory traditional economic thought would find it very difficult um to make sense of why somebody would give up a huge amount of money for charitable activity well traditional economists might say that giving to charity might increase utility for that individual which might be why charitable activity takes place but behavioral economics maybe gives us a better understanding which is that consumers are not all the time rational utility maximizing robots consumers have got morals they've got feelings their emotions that might influence decision making so when it comes to charity maybe it's a moral value they attach to giving to charity maybe it's an emotional feeling they have to help their fellow human being which explains charitable activity at the same time what about firms making employment decision decisions or traditional economic thought would say that firms will only employ workers if there is a need for those workers right firms of profit maximizes it would make no sense for firms to hire workers unless they need those workers to then boost the profits of the firm but there are instances in the world where firms will employ people not because there is a need for them to work in that company traditional economic thought would give no understanding to that idea at all there is no way to explain that kind of behavior at all because firms are always profit maximizers whereas behavioral economics would say well hang on firms again may have other considerations employees might have other ideas in their mind maybe they don't want these people to be living on the streets they want to give these people a decent standard of living hence why they're employing them even if there isn't necessarily A need to hire them maybe that that firm or that employee is concerned about the conditions of that uh of that person you know the state at which they are living in maybe that uh firm is concerned about the level of unemployment in society and wants to do their bit to keep the unemployment rate as low as possible you know behavioral economics would consider that kind of idea traditional economic thought in the terms of profit maximizing would not consider that thought so Notions of altruism is selflessness and kindness you might argue behavioral economics gives you a better understanding of why such activity takes place compared to traditional economic thought stay tuned for my next video when we look at applying this to policy making and to see whether our decisions can be influenced to overcome various market failures I'll see you all in that next video thank you so much for watching