Behavioral Economics is the learning of psychology and how it is linked to the economic decision-making procedures of people and organizations, and how they behave the way do in the real world. For example, individuals always make optimal decisions that give them the best advantage and satisfaction. The assumption in the ideal world is that people are capable of making rational decisions by weighing the costs and benefits of each option availed to them. However, this is not the case according to behavioral economics which postulates that humans are irrational and are incapable of making the right choices (Kenton, 2020). Further, the decisions people make do not follow the predictions of economic models. Additionally, it recognizes that humans are emotional and their behaviors are subject to cognitive bias and social influences and can easily be distracted.
This field is important because it assists with the understanding of people’s economic behaviors and the reasons why actors resolve to take specific actions on some issues. Insights into behavioral economics such as policymaking and decision-making can help the institutions and governments in formulating good economic policies. This could lead them to effective ways of framing their choices and taking the right actions (Penpoin, 2022). The psychological element creates the understanding of the motives behind the choices individuals or institutions make and why they behave in some way. This brings into focus The COVID-19 pandemic that created a massive global health crisis that negatively impacted all sectors of the world economies (Bavel, Baicker & Willer, 2020). Governments imposed restrictions on movements within and outside their borders, companies were shut down, people lost jobs, and livelihoods were destroyed. Globally, the crisis is not over and it calls for a change to what is called the new normal way of operations. Behavioral economics could give insights to individuals and institutions on how to improve world economies through analysis and aligning of human habits.
Statement of the Problem
The COVID-19 pandemic and its effect pose a challenge to individuals, institutions, and governments globally. Several economies are still dealing with the negative impact it created that made them incur financial losses (Bavel, Baicker & Willer, 2020). It is evident that this crisis and the new way of life will persist for long. This calls for changes in the behaviors of humans and companies so that they can cope with the new normal. Therefore, behavioral economics (BE) is key in helping individuals, corporates, and government agencies to adapt to the post-COVID-19 ways of doing business or working. This paper will investigate how behavioral economics can be used post-pandemic to help improve the economy. It will assess how BE can improve economies, public policy, decision-making, post-pandemic business crisis management, and its effect on influencing social norms.
The research question will be reframed into any hypothesis that shall form the basis for analysis and drawing up conclusions about the effect of behavioral economics on improving the economy post COVID-19 pandemic. The null hypothesis will be that, there is no effect of behavioral economics on the economy post the pandemic Alternative hypothesis will be that. Behavioral economics has an effect on improving the economy post-pandemic. After gathering information from various sources including articles, reports, journals, and websites, the researcher will then analyzed the data and either reject or uphold the null hypothesis. In the evident that there is sufficient evidence to support the null hypothesis, then the study will fail to reject the proposition. On the other hand, if the findings will reveal enough reason to believe that behavioral economics can improve the economy post the pandemic, then the alternative hypothesis will be validated.
Behavioral economics challenges the assumption that people always make rational decisions according to the options they have and weigh costs against the benefits before deciding. It is premised that choices are bounded by limitations on resources such as time, information, and knowledge which impedes the people’s capacities to rationally make the right choices (Corr & Plagnol, 2018). Thus, individuals rely on heuristics and biases in judgment when deciding on what actions to take from several options. Therefore, it tries to lead people or organizations away from intuitions and prejudice toward optimal decisions (Tagliabue, Squatrito & Presti, 2019). There is evidence showing that behavioral economics can positively influence several safety and health-related choices and practices (Sarpy et al., 2021). Since 2008, the use of behavioral economics, particularly the nudge theory, by corporates and governments to influence policies and practices worldwide has increased (Gino, 2017). Known deviations from rational decisions can be converted into interventions that assist humans to make the right alternatives.
The United States federal government established the social and behavioral science team in 2015. This group’s main task was to investigate how behavioral economics can be used to solve policy problems (Sarpy et al., 2021). Further, the UN employed its first behavioral science advisor in 2016 after realizing that it is insightful in policy formulation (Corr & Plagnol, 2018). Post COVID-19, the National Academies of Science, Engineering, and Medicine incorporated behavioral economics into their communication encouraging the adoption of protection to control the disease.
Behavioral economics (BE) uses psychological experiences to create theories about human decision-making. BE tries to change the way economists think about people’s viewpoints of value and choices. It postulates that individuals’ thinking is subject to a lack of knowledge and processing capacities, which oftentimes involves uncertainty and is affected by the context in which they make decisions (Samson, n.d.). People are mostly influenced by the information they have in their memory. Further, humans live in the moment and always fail to predict their future behaviors. It adds that being social animals, they are driven by their social preferences, trust, and fairness, and are susceptible to social traditions. This is demonstrated in detail by the theories highlighted below.
Rational Choice Theory
This theory is normally applied in many areas including economics, psychology and philosophy. The focal point of the concept is that humans have a strong inclination towards a particular choice and engage in enhancing their behavior ((Samson, n.d.). It envisions the ideal world where people are supposed to make choices after carefully weighing the cost and being informed by existing tastes (Samson, n.d.). In addition, it supposes that when people are entrusted with various alternatives under established conditions of shortage, they would choose on what maximizes their fulfilment or pleasure (Samson, n.d.). The theory assumes that a rational person has self-control with no emotions and cannot be influenced by external forces when deciding for themselves. On contrary, behavioral economics disproves this and explains that people are not rational and have no ability to make efficient choices.
It indicates that the decisions are not always optimal, and the willingness of humans to take risks is dependent on how the choices presented to them are framed. For example, in some cases when they are faced with two or three or more options from which to decide, people will likely opt for the riskless alternative (Samson, n.d.). On the other hand, they could go for the riskiest option depending on the context in which they are framed. This is so because mankind dislikes losses more than they like an equivalent benefit.
Bounded Rationality Theory
According to this concept, people’s minds must be understood based on the environment in which they exist or operate from. It is anchored on the premise that humans’ decisions are not optimal and they are restricted to information processing which is characterized by limited thinking capacities. The viewpoint of this theory is that the rationality of decisions depends on the structures available in the immediate surrounding (Samson, n.d.). Hence, individuals are “ecologically rational” when they make use of scarce information processing capabilities, leading them to near-optimal choices. As a result, humans are always heuristics and biased when choosing from a pool of options available.
Mental Accounting Theory
The viewpoint in this theory is that people think of value in relative rather than absolute terms because they get pleasure from both the value and quality of the object. Further, humans oftentimes fail to look at the opportunity cost due to their susceptibilities to the sunk cost fallacy. For instance, individuals treat money differently depending on factors such as where it originates from and what they intend to use it for (Samson, n.d.). It is driven by money is interchangeable and has no labels. In mental accounting, assets are treated as fungible than they really are. This bias affects even professional and experienced investors and pushes them to make choices. Additionally, consumers’ preferences to work with mental accounts are visible, especially in the financial field (Zhang & Sussman, 2018). For example, banks give clients third-party services like aggregate financial data across many financial institutions.
Evidence that Behavioral Economics can Improve the Economy
Behavioral economics is gaining momentum in various institutions and governments globally. Commercial ventures are using BE to inform their marketing strategies whereas government agencies are embedding it as a tool they use to gain insights into their policies (Baddeley, 2020). Further, experiences from behavioral economics are defining the associations between workers and their employers in companies. Modern economists use it to create a rich knowledge of psychology to elaborate on how economic stimuli are transformed by psychological influences.
Behavioral Economics in the Public Policy
There is evidence suggesting that BE has been getting attention from academics, governments, and public policy journals. For example, for about 7 decades, public policy in a number of countries has been associated with the field of human behavior (Straßheim, 2020). In the 70s experts in strategies were already debating the non-regulatory interventions to influence behavior in areas such as traffic safety regulation, environmental protection, and health (Graf, 2019). In the 80s behavioral economics emerged and it helped public policy analysis and practices to aid the discussions concerning behavioral dimensions (Torgenson, 2019). Some frontrunners in this are the US, the UK, and Singapore in which BE was used to influence human behavior.
Today, behavioral economics is applied in many countries across the world. For example, many countries in Western Europe, Central America, Asia, Africa, and the Middle East have integrated BE in their policies (Straßheim, 2020). In governments and private institutions, expertise and evidence-based policies shaped by BE have become a common occurrence globally. In the US, President Obama’s executive order in September 2015 directed federal agencies to include insights from behavioral science into their programs (Congdon & Shankar, 2018). It has enhanced a better understanding of people’s behaviors which are transferred into effective public plans.
Behavioral economics is capable of influencing the social norms of peers such as friends, family members, and colleagues in workplaces. It has the effect of creating herding behavior in people simply by considering that particular actions are either good or bad based on the conduct of others (Soofi, Najafi, & Martin, 2020). The implication of this habit is that if a program is focused on encouraging individuals to take certain decisions, then it is best if they are informed using examples of their peers. In an experiment done in Minnesota, one of the interventions informed people that 90% of the population had paid taxes, and it created compliance when compared with other methods (Soofi, Najafi, & Martin, 2020). Therefore, telling humans to adhere to some behaviors should involve evidence of what people close to them are doing.
Behavioral Economics in Decision Making
BE avails insights to help in economic decision-making based on the rationality of how human psychological tendencies influence economic life. It explains that individuals make choices through heuristics regardless of how it is close to the real facts or solutions. Many development economists argue that the “irrational” parts of human decision-making cancel each other when many people interact (Wilson, 2020). Research evidence shows that psychological, social, and cultural behaviors influence people’s decisions and have a significant effect on development results. Therefore, BE can help individuals, institutions, government, and their agencies to create sound policies that are efficient in expanding human knowledge when making decisions (Wilson, 2020). Good choices have the potential to lead to new economic interventions that can assist households to save more, firms to increase productivity, and communities to reduce poverty.
Behavioral Economics in Crisis Management
BE is vital in crisis decision-making because it helps in making rational choices in a catastrophic environment. For instance, during the 2008 economic melt-down, behavioral economics put the mess into perspective by attributing it to psychology and stressing the deficiencies of the individual mind, revealing the mistakes that were made. It explained that the investors failed to behave rationally as expected by the conventional economic norms (Kaya & Gamze, 2018). This led to a conclusion from BE’s viewpoint that decision-makers made the wrong choices that precipitated the crisis.
Irrational behavioral tendencies ended up affecting the investors, organizations, supervising institutions, credit rating corporates, and financial markets In addition, over-optimism, and too much confidence from investors escalated the financial problems by misleading them into taking the wrong and ambitious decisions. Their stakeholders were careless and did the wrong risk assessment led to unbalanced market-creating vulnerabilities (Kaya & Gamze, 2018). Behavioral economists recommended actions such as the organization of investments depending on tax plans, encouraging social savings, and improving monetary policies. Likewise, it proposed that in the future, investors, and financial institutions must avoid making decisions that are constrained by their limited cognitive capabilities and social environments.
Behavioral Economics in Post Pandemic Management
The COVID-19 pandemic has brought many changes as people began transforming their ways of life into the new normal. It brought a total organization of how people work and transact business. Companies resorted to the digitization of their operations and remote working (Hitt, Arregle & Holmes, 2020). Strategically, firms could need a hybridity mode of operations, which involves the integration of different strategies, logic, and structural forms. Corporates must adopt flexibility for them to implement changes to how they execute their functions (Hitt, Arregle & Holmes, 2020). Managers and executives will need new cognitive capabilities and emotional skills within and outside their organizations.
Companies and governments will have to incorporate behavioral economics in how they automate their operations through the use of artificial intelligence. Organizations will have to constantly remind their staff of changed social norms to cultivate good behaviors for the greater benefit of all employees and the work environment. Managers must focus on the new social needs of employees by availing them of information that is at their abilities to use well (Hitt, Arregle & Holmes, 2020). Organizations must inculcate behavioral changes among employees that will help them manage the post-pandemic effects created in their businesses and be able to increase their productivity and competitiveness. Further, firms must employ behavioral economics viewpoints to develop sound decisions that are necessary to take them forward. Leaders will need to inculcate trust as a key value so that their workers can have confidence as sources of information to believe. This will go a long way toward motivating employees and keeping the business vibrant. Only employers with a clear knowledge of their workers’ behaviors will navigate a post-pandemic economic crisis and remain afloat in the market.
This research will employ a case study design by incorporating qualitative and quantitative methods respectively. This approach involves description, evaluation, and understanding of different aspects of the research topic (McCombes, 2022). Further, this technique allows the researcher to document an array of viewpoints about the topic better compared to a survey or an interview, thus, eliminating the chances of any bias in data collection. A case study in this context will be necessary in assisting the researcher to gain contextual and in-depth knowledge about the topic through the exploration of the meanings and implications of the cases. More than one source talking about the topic will be analyzed and their themes put into context to answer the research question (McCombes, 2022). The cases will be picked from sources that are aligned with themes already discussed in the literature review.
Data will be gathered using document analysis techniques from secondary sources such as journal articles, websites, and online reports about the research topic. This method is valuable because it method allows researchers to conduct studies they might otherwise not be able to complete by analyzing existing data (Morgan, 2022). The approach is useful in helping the investigator to understand the content across different time frames and geographical locations, by capturing details and triangulating information from various sources. Further, there is a larger pool of sources with numerous literature on this study question. Additionally, the method gives the researcher the room to use flexible thematic analysis to come up with the findings and conclusions. Textual analysis will involve understanding the meaning and implications of themes (McCombes, 2022). The findings will be linked to the literature for an appropriate conclusion.
Context analysis will be used to identify patterns and themes in the data from various sources including reports, articles, journals, and websites. It will help the researcher to derive the purpose, and meanings that relate to and answer the research question. This will reveal the semantic relationship of concepts that tries to explain the topic. The patterns coming out of the themes will help in demonstrating the correlations that are emerging from the question being answered (Luo, 2021). This technique is good for unobtrusive data gathering where information is analyzed without the direct involvement of the participants and therefore, the presence of the researcher does not influence the results. It is capable of giving reliable findings because it follows a systematic procedure. Further, the method is flexible and can be done at any time, in any place, and at a low cost.
Based on the study question, the researcher must choose the texts that they will analyze. Firstly, decide on the sources to use, then define the units and categories of the analysis. Secondly, decide the level at which to analyze the selected by defining the units of meanings that will be coded. Subsequently, the rules for coding should be developed so that data are organized into previous categories (Luo, 2021). Lastly, the raw data will be analyzed to discover the patterns and to assist the researcher to draw conclusions.
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