Behavioral economics combines economics and psychology in order to learn about people’s behavioral patterns observed in real contexts. Research results of behavioral studies can then also feed into the development of better solutions to help people reach their goals.
A famous example is the influence of cognitive biases on behavior, which was investigated by Nobel Prize recipient Daniel Kahneman among others. Cognitive biases, such as time inconsistencies, are a behavioral pattern in which a preference changes over time in such a way that it becomes inconsistent later. For instance, at the end of the day, laborers can decide whether they spend or save their daily wages. Let us assume that every evening, they decide to spend today’s earnings but save tomorrow’s earnings. Typically, this decision is time inconsistent. By postponing every day the decision to save to the day after, the money earned is always spent and never saved. Similarly, one often observes petty traders in developing countries borrowing money every morning at very high interest rates from moneylenders whereas at the same time depositing savings in a zero-interest savings account. While mental accounting processes can explain such patterns, the observed behavior is still very expensive and obstructs the accumulation of productive savings.
Using insights from small-scale behavioral experiments, one can develop potential remedies to expensive behavioral patterns so as to help people to keep on track with their own preferences and goals. As a concrete example, emergency savings accounts, which help people to save for emergencies, have been developed in cooperation with the Negros Women for Tomorrow Foundation (NWTF) in the Philippines and subsequently evaluated in a large-scale RCT.