Get a clear behavioral economics definition covering how is is driven by human choices and how it affects financial organizations.
Definition of Behavioral Economics
Over twenty years ago, economists studied our cautiously ranked series of preferences and then our choices for increasing personal welfare. In recent times several studies have started to amend our understanding by highlighting the importance of sentiments and perceptions. Behavioral economics recognizes that people normally act by instinct, through habit, or automatically, making decisions according to rules of thumb. It is a fact that human choices are subject to several biases in our thinking that are economically irrational. Read of human choices and how this system affect financial institutions following:
Human Choices – What was I thinking?
You are probably thinking that you settle on rational financial decisions at most times, right? Well that may be the case, but many of us do not. If you have ever wondered “what was I thinking when I bought that stock?” or similar, you’ll understand what I am talking about.
We like to think that we make choices neutrally and after enough deliberation. However, psychology and neuroscience studies constantly show that our inherent biases or ‘cognitive biases’ determine our choices. These are developed during our early lives and typically persist. As a result we often tend to respond emotionally or intuitively rather than deliberately and rationally.
This may result in poor judgment in many life aspects and oftentimes it need not have serious consequences – we’re all humans and we are prone to making mistakes. Conversely, when it can lead to financial collapse like it did for many during the Global Financial Crisis it happen to obligatory to get the decision right, and to find the reasons why that may not be possible.
How does it affect financial organizations?
A lot of financial institutions have come under the limelight for their strategies in marketing in recent years. They all seek strong economic development. Fingers point at efforts to take advantage of customer decision-making by alluring to their biases, deliberately driving them to less effective choices than competing products or alternatives.
Because of interest from regulators of financial market about these practices, it’s only a matter of time before financial products and/or services come under the hammer from regulators again, in a bid to protect customers. Financial products are habitually complex. Some however deliberately present them as confusing or misleading, and the regulators will be targeting this. Financial institutions need to study how they present their product and service range to their customers to make features more transparent.