Before you read on: since 2012, UK employers have put eligible staff into a workplace pension unless they opt out. What share of 2018/19 enrolees opted out within a month?
Only about 9 per cent opted out. Behavioural economists expected this, because people tend to stick with whatever option is already set.
- Emerged
- Roots in Herbert Simon's work on limited rationality from the late 1940s and 1950s; grew from psychology experiments by Daniel Kahneman and Amos Tversky from the 1970s
- Key figures
- Herbert Simon (1916 to 2001), Daniel Kahneman (1934 to 2024), Amos Tversky (1937 to 1996) and Richard Thaler (born 1945)
- Key works
- Simon's Administrative Behavior (1947); Kahneman and Tversky's paper on prospect theory (1979); Nudge by Thaler and Cass Sunstein (2008); Kahneman's Thinking, Fast and Slow (2011)
- Nobel prizes
- Simon in 1978; Kahneman in 2002, shared with Vernon Smith; Thaler in 2017
- Where it shaped policy
- The UK's Behavioural Insights Team, the first nudge unit, set up in 2010; workplace pension auto-enrolment from 2012; nudge units in other countries, including the US
What it was reacting to
Standard economic models describe a decision-maker with unlimited reasoning power, unlimited willpower and purely selfish aims.
Herbert Simon argued that real people cannot work this way. Information is costly to gather and many consequences cannot be known, so people aim for a result that is good enough. From the 1970s, Kahneman and Tversky ran experiments showing that choices depart from the standard model in systematic, predictable ways.
The key ideas
Can you name the four key ideas of behavioural economics?
Herbert Simon's term for the limits that time, information and brainpower set on decisions. Instead of searching for the best option, people satisfice: they settle for the first one that meets their standard.
Can you think of an example?
A student looking for a flat takes the first one within budget and a short walk from campus, without viewing every flat in the city.
Heuristics are mental shortcuts. Kahneman and Tversky found that they lead to biases: errors that point the same way again and again, such as judging how likely something is by how easily examples come to mind.
Can you think of an example?
After news coverage of a plane crash, people rate flying as more dangerous, though the risk has barely changed.
Kahneman and Tversky's 1979 theory of choice under risk. People judge outcomes as gains or losses from a reference point, and a loss weighs more heavily than a gain of the same size. That second feature is loss aversion.
Can you think of an example?
Offered a coin toss that wins £110 on heads and loses £100 on tails, many people turn it down, though on average it pays.
Richard Thaler's idea that people sort money into separate mental accounts and judge each decision by its effect on one account, rather than on their wealth as a whole.
Can you think of an example?
A family meets a surprise bill with an expensive loan while leaving its savings untouched in a holiday fund.