How to Apply Behavioural Economics to Your Daily Life
Economics is not just about money; it is mainly about making choices and decisions in different areas of life. Even decisions that seem simple, like choosing which supermarket to go to, involve considering all associated costs, such as travel expenses, time, and effort. Applying economic principles, especially those from behavioural economics, can help improve decision-making.
One important principle is the cost-benefit analysis. Instead of listing pros and cons, a more objective approach is to assign scores to each cost and benefit, including financial, time, effort, and environmental costs, and then compare them. This method helps in making better decisions, for example, when choosing between travelling by train or plane.
Behavioural economics also highlights human biases such as present bias, where people overvalue immediate rewards over long-term gains. This explains procrastination and impulsive spending. Being aware of this tendency allows us to implement strategies, like using savings accounts that are hard to access, to avoid immediate spending.
Another common pitfall is the sunk-cost fallacy, which leads people to continue investing in something simply because they have already invested time or money. This can be seen in situations such as overeating an expensive cake, staying in an unfulfilling friendship, or persisting with a failing business idea. Recognising this fallacy helps avoid decisions that go against our best interests.
The law of diminishing returns reminds us that after a certain point, adding more effort or resources does not increase benefits and may even be counterproductive. For instance, inviting too many friends to help paint a room can cause chaos, and eating too many slices of pizza can lead to discomfort. Understanding this law emphasizes that doing your best is sufficient, and more effort is not always better.
Finally, the concept of “no free lunch” teaches that nothing is truly free. There is always a cost, even if hidden, such as the case with free social media sites where the user becomes the product. By applying these principles and being aware of biases, we can make smarter, more rational decisions in daily life.