Behavioural economics
Ben Knowles
My essay is focused on the use and application of behavioural economic theory in the policies that the UK government and other governments around the world have used to combat the spread of Covid-19 and manage its impact on the economy. Behavioural economics itself is a relatively new science compared to standard economic theory and has become increasingly important and influential in governmental processes and decision-making. The introduction of behavioural economics into common parlance mainly began in 2008 with the publication of Nudge by Thaler and Sunstein. Behavioural economics ’ use in creating cost-effective and more reliable economic policies has led to many behavioural insight teams being created in countries around the world with the goal of creating policies using the behavioural economic model as a foundation. Covid-19 has very quickly become a significant historical moment and so I believe it is interesting to discuss how certain countries have reacted and attempted to control the spread of the virus and its impact through behavioural economics. Owing to the current high level of global connectivity, with international trade in goods and services and increased people mobility between countries, what might have once been an isolated issue has quickly become a global issue affecting every economy. There have been many different approaches that countries have taken, each with their own merits, some having positive and others negative impacts on both their own economies and also their key trading partners. This essay will explore the cases of New Zealand, Singapore and the UK. Behavioural economics is the economic theory that introduces various external sciences like neuroscience and psychology to explain more effectively certain economic decision-making processes that would be not be considered when using the standard economic rational consumer model. Behavioural economics does this by studying the effects of psychological, cognitive, emotional, cultural and social factors on economic actors. In doing so, it helps to explain why many standard economic theor ies don’t work effectively, particularly in moments of crisis. It also helps to explain why some policies have unintended consequences. An example of irrationality in the real world is the nature of gift-giving. If a human was to react completely rationally, then the best present they could receive would be money as you are guaranteed the highest level of utility from it because only you can know what you need the most. This is quite obviously not the case as most people would prefer a gift that demonstrates a close emotional connection This demonstrates that there must be other factors that influence our preferences. Humans do not act rationally most of the time, meaning that behavioural theories that account for this irrationality are seemingly going to work for a greater number of scenarios and situations. However, it can be argued that inmost occasions the irrationality will balance out to a seemingly rational mean – some people may overestimate, and some may underestimate – , meaning that on average it f alls into themiddle. Froma government’s point of view, standard economic policies are heavily restricted in their versatility, as they usually all revolve around money and incentives, meaning that they usually have high costs; they are also, however, usually much easier to implement and create when compared to behavioural policies.
With regards to Covid-19, the aforementioned points have high relevance as people are even less likely to act rationally in more stressful scenarios. Throughout all walks of life and spread through almost all
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