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Behavioural economics of Richard Thaler



  Apr 06, 2024

Behavioural economics of Richard Thaler





Behavioral economics, introduced by scholars like Richard Thaler, challenges the traditional economic assumption that people always act rationally. Here are some everyday examples to illustrate this concept:


Loss Aversion: People tend to prefer avoiding losses rather than acquiring equivalent gains. For instance, someone might avoid investing in the stock market due to the fear of losing money, even if the potential gains are substantial.

Status Quo Bias: This is the preference to keep things the same by doing nothing or sticking with a decision made previously. An example is when people stick to their current job, even if there’s a better opportunity elsewhere, simply because they fear change.

Anchoring: This occurs when individuals rely too heavily on the first piece of information they hear. For example, if the original price of a shirt is marked as ?2000 and then reduced to ?1000, consumers might perceive it as a bargain, even if ?1000 is the shirt’s actual value.

Endowment Effect: People ascribe more value to things merely because they own them. For example, a person might value an old watch they own more than a new one in the store, simply because it’s theirs.

Nudge Theory: Popularized by Thaler, this theory suggests small design changes can “nudge” individuals towards better choices without restricting their freedom. In India, this concept has been applied in various public policies. For instance, the government’s push for the use of digital payments over cash transactions is a nudge towards a less cash-dependent economy.

Richard Thaler’s work has influenced economic policies worldwide, including in India, where behavioral insights are increasingly used to design more effective public policies and programs.


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