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Introducing Behavioral Economics

In class, we briefly discussed behavioral economics as we learned pricing. The field of behavioral economics studies how psychological factors prevent humans from being consistently rational in making economic decisions. Here is a video and two behavioral economics principles to help learn about behavioral economics:


Okay, this video is game theory, a category that compliments behavioral economics, actually. Those willing to watch much longer videos should google Dan Ariely. The following scene from the movie A Beautiful Mind explains a simplified version (according to the comments) of the Nash Equilibrium.


Another study reveals that people switch preferences upon realizing their lesser-preferred product is free. Hearing the word free greatly excites customers, as seen through this example on people want their 15 cent Lindor chocolate instead of a 1 cent Hershey’s Kisses chocolate, but if each chocolate’s price went 1 cent down (maintaining a 14 cent difference, that had economists believe their decision would not change) people switch to wanting that free Hershey’s Kisses chocolate.


One more. Say you offer two choices: choice #1, which the customer prefers, and choice #2, which you prefer (being more expensive or whatnot). If you offer a third choice that alters choice #2 to be less desirable, the customer is more likely to choose choice #2 than he/she is with only the original two choices. Why? Choice #2 suddenly looks good because of a comparable option. Choice #1 becomes easier to ignore. People have limited knowledge on how much something is truly worth, and use comparisons to judge. 



Chase Robbins