Incentives and Behavioral Economics

Incentive vs disincentive

incentive: a positive benefit that motivates a person to change their behaviour

disincentive: negative factors that discourage particular behaviours

traditional economics

• rational, accurate information, costs, benefits analysis, self interest

  • rational: based on reason/logic, reasonable, sensible

  • self-interest: personal benefit w/o regard for others’ interest

• important element of this theory is concept of ‘home-economicus’

  • consumers: maximize satisfaction & minimize costs

  • firms: maximize profits

• govt. intervention using trad economics

  • financial incentives (e.g. subsidies) or financial disincentives (e.g. tax) & mandates (law)

behavioral economics

• influences by psychological, social, emotional & cultural factors

  • irrational and may be influenced by social & cultural factors

  • consumers: may not be based on maximizing satisfaction & minimizing cost

    • incomplete knowledge & inability to weigh up the costs 7 benefits

• firms: not only about maximizing profit

• Govt. intervention using Behavioral Economics

  • behavioral nudges

behavioral nudge

• any attempt to influence a person’s decision-making using psychology and behavioral economics theories

• behavioral nudge different from financial incentive/disincentive/mandate → attempts to change peoples’ behavior w/o changing their incentives or taking away their choices

example of difference between behavioral economics & traditional economics:

• behavioral nudge: encourage people to recycle by painting green footprint → recycling bins

• financial disincentive: imposing fine for fail to recycle

• mandate (authoritative order to not do something): banning use of plastic bags