When you hear someone say ‘behavioural economics’ what words come to your mind? Do you begin to think about that boring introductory economics class you had in your second year? In that instance, maybe you think back to basic concepts like supply and demand or the must read book ‘The Wealth of Nations’ written by Adam Smith, the father of modern economics. However, the best way to grasp the basic idea behind behavioural economics is to know that the field strives to understand behaviour and how people make decisions. What makes this field of study ‘economic’ is that it utilises principles in economics and incorporates them when studying the decision making process.
Behavioural economics was actually first developed as an academic response to the concept of the ‘rational consumer’ in traditional economics. Specifically, according to economist Stephen Miller humans display behaviour according to homo economicus which suggests that we have full awareness of all the costs and benefits that arise as a result of a decision. But in reality, humans are not very rational creatures and we do not conduct a careful cost and benefit analysis of each action we take. Actually, it would be almost impossible to act in accordance with homo economicus as our rationality is bounded, a theory proposed by cognitive psychologist Herbert Simon in that we are limited in mental capacity, available knowledge and time. To summarize, in response to this false profile of human behaviour, behavioral economics posits that humans are irrational and that this irrelationity is the result of psychological factors.
Although there is a continuum that exits within the field regarding explanation of human irrationality. The end of the continuum that we are most concerned with in this article is the mentalistic perspective, which suggests that there are cognitive factors and dispositions which affect behaviour and consequently decision making. Therefore, in order to understand how we make decisions, we must discuss three basic concepts: heuristics, biases and cognitive dissonance. To begin with, a heuristic is a cognitive shortcut that allows people to make decisions quickly and efficiently. These heuristics are incredibly beneficial as they are an evolutionary adaptation. The use of heuristics by early humans allowed our ancestors to survive, for example when a predator approached you from across the savannah you could make a split second decision to flee. However, the benefits and cost of these heuristics differ in the contemporary human as we are faced with a completely different environment.
Secondly, the concept of biases was first introduced by Daniel Kahneman and Amos Tversky in 1972, two incredibly prominent figures in the field. As people consistently use heuristics in everyday life, we are extremely prone to committing these systematic errors. These biases can lead to stereotyping, prejudice, and inaccurate judgement and all in all bad decision making skills. The list of cognitive biases and heuristics that we commit on a daily basis is massive, however the mother of these biases is cognitive dissonance. The theory of cognitive dissonance was developed by Leon Festinger, and it posits that when someone holds two or more opposing thoughts (ideas, beliefs, knowledge, behaviours), that person experiences a state of mental discomfort and stress. This is in accordance with the fact that humans strive for consistency in everything: how we behave, what we think and especially what we say to our friends. When cognitive dissonance does occur, most people will do everything in their power to make this cognition more consistent such as hiding certain actions or beliefs or even going as far as denying the contradiction.
So after basically reading an introductory course of behavioural economics, you may be thinking: why does any of this matter? If heuristics are so widespread then how would it even be possible to begin combating them? Well, the first way to begin understanding how your heuristics affect you is to gain awareness. Although, heuristics are conducted on an individual level, collectively the real life effects of heuristics on decisions is massive. There are numerous biases that affect almost every decision from what pension plan to sign up for to what insurance policy to buy and even to which candidate the nation votes for. But for the sake of time, we will only be discussing the factor of time, specifically how the days of the week affect our decisions.
To set the context of this topic of time, ask yourself: Do you consider yourself a consistent person throughout the week? Does your mood differ on a Monday morning in comparison to a Friday afternoon? The answer is most definitely yes, considering that most of human society is organized according to the 7 day week period, therefore making our activities almost ‘enslaved’ to this cycle of time. One important aspect of cognition that is affected by the days of the week is risk tolerance and this is directly related to mood throughout the week. According to a research study conducted by Jet Sanders and Rob Jenkins at University of York, our moods tend to be more negative at the beginning of the week and consequently during this period we tend to be more risk tolerant. However, as the week goes on by Thursday our mood becomes more positive, therefore we become more prone to risk averse behaviour. The researchers of this study stated in their article that “we expected if weekday affects moods and mood affects risk tolerance, then weekday should affect risk tolerance”. They demonstrated this hypothesis by conducting a study on the Scottish Independence referendum 2014 in terms of how weekly fluctuations affect voting outcomes.
During the referendum, Scottish citizens had the rare chance to vote their country into independence from the rest of the United Kingdom. The researchers of this study analyzed the voting intentions of 80,000 Scottish citizens and it was found that approximately 50% wanted to gain independence on Monday (this was not during the week of the election). However, as the week progressed the number of people voting yes for independence decreased by a little and this decreasing trend continued until Thursday in which 4% more people wanted to vote against Scottish independence in comparison to Friday. Basically, Thursday can be considered the inflection point as risk averse behaviour is highest during this part of the week but then by Friday it begins to decrease again. And guess what day of the week was the referendum held? It was a Thursday. All UK general elections have always been held on a Thursday since 1935, and the results of this study suggest that holding general election on these days could be “consistently biasing UK election towards more risk averse outcomes”. The researchers of this study suggested a mediating strategy for the effect of weekly fluctuations in elections by allowing voting to span over several days not one as it tends to be with voting by mail.
According to the latter, it is apparent that the weekly fluctuations of our behaviour can go as far to affect a national general election. Not only that but results such as these may seem quite daunting and as if the perceived control over our behaviour is diminished. However, it is important to remember that humans are not gods when conducting their daily behaviours and decisions. In fact, we should have some pride in our very human ability to make fast and efficient decisions with the limited mental resources presented to us. Without heuristics you would not function properly and without biases you wouldn’t make such prejudices and stereotypical judgments. Although that last part might sound like a great thing, life would be incredibly boring and dull if you and your friends always held fantastically accurate conversations. Where would the fun be in that? At the same time, it is essential to be aware of how factors such as time affect our behaviour. In achieving this, you become one step closer in being a better decision maker.
References:
How the day of the week affects your decisions | Jet Sanders | TEDxKlagenfurt[Video file]. (2019, August 28). Retrieved November 23, 2020, from https://www.youtube.com/watch?v=RazYS7wlwFQ
Reed, D. D., Niileksela, C. R., & Kaplan, B. A. (2013). Behavioral Economics. Behavior Analysis in Practice,6(1), 34-54. doi:10.1007/bf03391790Sanders, J. G., & Jenkins, R. (2016). Weekly Fluctuations in Risk Tolerance and Voting Behaviour. Plos One,11(7). doi:10.1371/journal.pone.0159017
