8. Behavioural Insights

Decision utility

perception of utility before experiences

Experienced utility

actual utility arising from the decision

hot state

a decision making state where choices are driven by emotions or impulses causing individuals to overweight immediate gratification (fast thinking)

cold state

decision making state in which individuals evaluate choices carefully and consistently with their long term interests (slow thinking)

what is maximised in the hot state and cold state

hot state maximises decision utility

cold state maximises experienced utility

what is u(x₁,x₂) equal to in the hot state and cold state for behavioural customers

hot state: ax₁ + x₂ where a > 1

cold state ax₁ + x₂ where a < 1

Why do behavioural and non-behavioural consumers exist?

not everyone’s decision utility differs from their experienced utility

non behavioural customers have stable preferences

Impact of tax or banning a good on non behavioural customers

non behavioural customers do not make mistakes and do not experience regret → tax may raise the price of the good they genuinely prefer → forces them to pay more for the same utility or switch to a less preferred alternative → utility/welfare falls not Pareto improving

How can you influence behavioural customers without distorting the non behavioural customers

Using a nudge → create a default option allowing an output → requires thought/effort, so forces the decision maker to think slowly and make choices in the cold self

libertarian paternalism

a policy approach that guides individuals to welfare improving decisions while preserving their freedom of choice

dark nudges

interventions in choice architecture that use behavioural biases to steer individuals towards choices that benefit firms over consumers

decoy effect

when the introduction of a third inferior option changes the consumers’ preferences between two existing options

high pressure sales tactics

strategies that intentionally rush decision making, pushing consumers into a hot state