28 January 2016

Behavioural economics and its application in driving consumer reaction

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Behavioural Economics: a method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making.”

The use of behavioural economics to drive better policy engagement is a relatively new field, ripe for exploration. By gaining an understanding of the power subtle changes can have and the impact they have on consumer behaviour, governments across Australia can better sell their economic policy messages, creating buy-in and community support.

Behavioural economics is the application of psychological insights into how human’s behave and react.

“Behavioural economists have shown that the hyper-rational, self-interested agents of standard economics are mythical creatures,” say Reuben Finighan, Senior Research Officer at the Melbourne Institute and Fellow of the ARC Life Course Centre of Excellence at the University of Melbourne in an article “The potential of behavioural economics: beyond the nudge.”

“Real-world people," he continues “are irrational, struggle to exert control over their emotions and impulses, and are social animals with a fondness for fairness.”

An exercise by the Economist put the idea of behavioural economics to the test when they launched two subscription offers simultaneously. The two offers were for an online only subscription for the price of $56 and a subscription for both the online and a print version for $125.

At first the demand for the first option was overwhelming. When the Economist released a third alternative, a print only subscription for $125 the tide changed. In comparing the three offers, consumers elected to purchase the second option. $125 for both the print and online options. But what had changed?

The introduction of the third option gave the consumers the belief that by purchasing the third option they were gaining the online subscription for free. The introduction of the third option suddenly made the second much more attractive and negated the first option altogether.

From a policy perspective behavioural economics can assist Australia’s Governments to help counter cognitive bias against traditional policy tools.

By collecting insights on the social, cognitive and emotional behaviour of both consumers and institution’s, Government’s will be able to drive better policy and engagement to the market. If Australia’s governments were able to apply subtle changes in the delivery of new policy initiatives they could have a big impact on voter’s behaviour.

Take a retail example. If you were to enter a store and see two special offers available, which would you automatically gravitate too; Buy 1 get 1 free, or 50% off if you buy two? Most people would gravitate automatically to the Buy 1 get 1 free option, but why? At first glance the word free stands out. People like a bargain, and 1 free resonates as more of a personal benefit than paying 50% for each item, despite the fact you’ll ultimately pay the same price.  

Amity Durham, Executive Director – Behavioural Insights at the Department of Premier and Cabinet in New South Wales will be discussing this important new innovation in policy at Akolade’s Australian Government Data Summit  to be held at the Rydges Capital Hill, Canberra March 22nd- 24th 2016.

Amity will be discussing how to utilise behavioural insights in the data, design and delivery of policy initiatives and examining the power of subtle change to deliver powerful impacts on behaviour.


 Akolade’s Australian Government Data Summit 2016 is on sale now. For further information on the topics covered, and the leading speakers who will be sharing their insights please click here.

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