Behavioural economics

Behavioural economics studies the relationship between psychology and economic decision-making to understand real-world behaviour.

It explores why people sometimes make irrational decisions that can be harmful to themselves and others. It is no secret that we are emotional and easily distracted people who are influenced by the world around us.

As a result, we fall victim to a range of behavioural biases and tendencies in everyday life. These can in turn influence how we approach (or avoid) either basic mundane tasks or complex problems, impacting the overall outcome.

Example from our own lives

Something as simple as ordering from a menu at a restaurant can be loaded with behavioural biases.

We might be faced with too many options on the menu, leading us to behavioural biases such as ‘choice overload’ (struggling to decide or act when faced with a wide range of options), and as a result we follow the ‘status quo’ (favouring the existing course of action taken by others) and select what our friends and family are ordering.

We may order something that we may or may not have wanted in the first place.

Example from business

Something as simple as ordering from a menu at a restaurant can be loaded with behavioural biases.

We might be faced with too many options on the menu, leading us to behavioural biases such as ‘choice overload’ (struggling to decide or act when faced with a wide range of options), and as a result we follow the ‘status quo’ (favouring the existing course of action taken by others) and select what our friends and family are ordering.

We may order something that we may or may not have wanted in the first place.

Example in a policy context

Behavioural economics concepts were used during the COVID-19 pandemic in relation to the communication and administration of vaccines and to inform national policies to drive vaccine uptake.

A review undertaken by the ESRI highlights the importance of ‘personal benefit messaging’ (e.g. avoiding disruptions to life due to illness), vaccine efficacy communication, and providing accurate and trusted information on social media as some of the key communication strategies that are likely to have increased vaccine uptake.

The ESRI also found that early personalised vaccine reminders, providing set appointment dates and times, and appropriate incentives (e.g. making it clear that the vaccine is free) are some of the key behavioural strategies that drove up vaccine uptake globally.

Behavioural biases tend to take us away from our desired course of action. We do not always make rational or optimal decisions even if we have the information and tools available to do so.

Behavioural economics accurately represents everyday economic decisions and their impact on outcomes. Understanding behavioural pitfalls can lead to better business strategies, informed policies, and new perspectives on traditional economic questions.

Examples of behavioural biases

Below outlines some everyday real-world examples of behavioural biases and how they can impact decision-making. This list is non-exhaustive.

Behaviourial bias	Description / rationale	Real-world example
*Availability bias*	Judgements based on prominent memories, accurate or not.	Insurance: Buying insurance after disasters (e.g. earthquakes or floods) due to media coverage making events seem more common.
*Bounded rationality*	Decisions based on limited information and cognitive capacity.	COVID-19 vaccines: Low uptake due to conflicting beliefs and narratives.
*Confirmation bias*	Seeking information that supports preexisting beliefs, ignoring contradictions.	Current affairs: Believing positive stories about supported politicians, ignoring critical perspectives.
*Hyperbolic discounting*	Preferring smaller, immediate rewards over larger, delayed benefits.	Pension saving: Procrastinating on saving for retirement due to preference for short-term gratification.
*Inertia*	Maintaining current actions despite new information or changes.	Financial decisions: Sticking with the same bank despite higher fees or lower interest rates.
*Social norms*	Acting according to group behaviour expectations.	Alcohol consumption: Misjudging drinking tendencies due to peer pressure or perceived behaviours.

Applications of behavioural economics interventions

Below are three examples of where and how behavioural economic concepts have been used in projects undertaken by the KPMG Strategy team:

Project 1 (Developing retirement living standards)

The team developed retirement living standard definitions for Ireland, providing a simple guide to help people save more effectively and reduce the mental strain of retirement planning.

The value-add of behavioural economics:

Behavioural economics identifies psychological barriers to saving for retirement, aiding policymakers in creating conditions for better savings. Over the last decade, the introduction of strategies such as auto-enrolment pension programmes in some countries built on behavioural economics research.

Auto-enrolment pension programmes, based on behavioural economics, increased UK savings by £33 billion over 10 years.

Project 2 (Contributions of solar energy to the Irish economy)

The team analysed the economic contributions of the solar energy industry to the Irish and Northern Irish economies from 2024 to 2030, focusing on achieving 2030 renewable energy targets.

The value-add of behavioural economics

Solar energy can contribute to the island’s energy targets and reduce consumers’ energy costs. However, there is generally low uptake by private households (From Census 2022 data, the CSO reported that ~6% of total households have solar panels installed).

Behavioural economics can identify barriers to household investment in solar energy, such as cost and procrastination, and develop strategies to increase uptake. The UK's Green Deal programme used behavioural insights to boost engagement with energy efficiency measures.

Project 3 (Understanding visitors’ travel behaviours in Ireland)

The team assisted a tourism authority to understand visitors' travel habits in Ireland, focusing on transport mode choices and the influence of prior engagement with tourist sites.

The value-add of behavioural economics

In Ireland, domestic and overseas visitors continue to rely on cars. Behavioural economics can help promote public transport use over cars, reducing CO2 emissions. The Netherlands' Optimising Use programme used nudging, incentives, and information campaigns to increase public transport usage.

In summary

Behavioural biases impact our everyday decisions. Understanding these biases helps policymakers guide choices and improve decision-making with well-designed strategies.

Behavioural economics interventions are gaining popularity across various domains, offering valuable insights that complement traditional economic theories and enhance models of human behaviour. These interventions help in better understanding consumer decision-making processes, enabling businesses and policymakers to refine their strategies and policies.

The ultimate outcome can be more efficiency, higher revenue, and greater uptake. We should expect to see more behavioural economics concepts being applied in commercial and policy contexts over the coming years.

For more, get in touch

If you have any queries related to incorporating insights from behavioural economics into your business strategy, please don't hesitate to contact our team below. We'd be delighted to hear from you.