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Research Outline
Prepared for Alvaro R. | Delivered November 27, 2019
Behavioral Economics
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Goals
How behavioral economics affects people's relationship with money or financial wellbeing, including hard data and facts about how behavioral economics prevents people or people be more mindful of their money or reaching goals.
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Early Findings
Counteracting the rational choice theory,
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economics explores the reasons people often make irrational decisions, especially when it comes to spending money or making purchases.
Slow Brain & Fast Brain
According to
Robert Schiller and George
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, Nobel Laureates in Economics, the poor financial decisions can be explained by the slow brain and hard brain concepts
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both under behavioral economics.
A lot of people decide to make purchases before studying the pros and cons of making such purchases
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called "
slow brain
." In addition, people tend to respond to immediate stimuli without reflecting
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called "fast brain." Both can have severe consequences on their finances.
For example, the way superstores are created forces consumers to go through the entire store. These consumers are then influenced by promotions and end up buying things they do not need, which could
negatively affect their finances.
These superstores have clearly incorporated behavioral economics.
Case Study 1: UK Personal Account Holders
One example of how behavioral economics contributes to poor financial choices is in the UK.
There are
arranged overdraft and
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overdrafts for personal account holders in the country. These overdraft products help UK citizens avoid any potential negative financial consequences.
Personal account holders in the country can apply for arranged overdrafts for a
low fee,
compared to
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overdrafts which have the same function but incur higher charges.
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overdrafts help people to settle
unexpected overdue bills
. As a result, UK consumers tend to use
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overdrafts too often and underestimate the financial impact it could have on them.
Around
37% of personal account holders
in the UK have an arranged overdraft, compared to
25% who use an
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overdraft. Studies have shown that those who use an
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overdraft and incur higher costs while using it, tend to be young or live in low income areas.
How Behavioral Economics Can Help People Better Financial Decisions
Economists assert that behavioral economics "show how to avoid falling into the
traps of your brain."
One trick economists recommend is getting to know your brain. This involves waiting a reasonable amount of time before making a purchase. This allows one to see if the purchase is necessary of if it is just an indulgence. Articles by the
New York Times a
nd Life Hack corroborate this concept. They advise that waiting 24-72 hours prior to buying something is a trick that helps financially.
They also recommend getting advice from people prior to
making a financial decision.
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