Principle S

The document outlines seven principles of human behavior in decision-making, contrasting neo-classical and behavioral economics approaches. Key principles include the influence of social behavior, the importance of habits, intrinsic motivations, self-expectations, loss aversion, difficulties with computation, and the need for involvement in effecting change. Each principle is illustrated with examples demonstrating how individuals make choices based on these factors.

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Hareema Kamran

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Principle S

Uploaded by

Hareema Kamran

We take content rights seriously. If you suspect this is your content, claim it here.

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Download as DOCX, PDF, TXT or read online on Scribd

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Principle 1: Other People’s Behavior Matters

This principle suggests that individuals often mimic the behavior of others, especially in
ambiguous situations or when seeking social validation. Social norms and peer influence
significantly affect our choices.

 Neo-Classical Approach:
I independently selected a car model based on its cost-benefit ratio, ignoring others’
choices or trends.
 Behavioral Economics Approach:
I chose a trendy smartphone because everyone in my social circle was using it,
influenced by the desire for social validation.

Principle 2: Habits Are Important

People frequently rely on habits for routine decisions, as it requires less cognitive effort.
Breaking or forming habits often requires significant motivation or external triggers.

 Neo-Classical Approach:
I analyzed multiple grocery stores for the best deals and adjusted my shopping
patterns accordingly.
 Behavioral Economics Approach:
I stuck to buying the same brand of coffee every time, out of habit, even though
cheaper options were available.

Principle 3: People Are Motivated to Do the Right Thing

This principle highlights how intrinsic motivations, such as a sense of fairness or altruism,
often outweigh external incentives like financial rewards or punishments.

 Neo-Classical Approach:
I calculated the tax deductions before deciding to donate to charity, seeing it as a
financial incentive.
 Behavioral Economics Approach:
I volunteered for a community clean-up event because it aligned with my personal
values, without expecting any material benefit.

Principle 4: People’s Self-Expectations Influence Their Behavior

People aim to align their actions with their self-image and values. Making commitments—
especially public or written ones—reinforces this alignment.

 Neo-Classical Approach:
I renegotiated a subscription I didn’t use to save money, disregarding past
commitments.
 Behavioral Economics Approach:
I fulfilled a pledge to support a friend’s fundraiser, even when inconvenient, to
maintain my self-image as reliable.
Principle 5: People Are Loss-Averse

This principle explains how people fear losses more than they value equivalent gains, often
leading to irrational decisions to avoid perceived losses.

 Neo-Classical Approach:
I sold a declining stock as soon as it hit a predefined loss threshold, minimizing
further risks.
 Behavioral Economics Approach:
I held onto underperforming stocks, hoping to avoid the psychological pain of
realizing a loss.

Principle 6: People Are Bad at Computation

Individuals struggle with evaluating probabilities and complex calculations. They often rely
on heuristics or biases when making decisions.

 Neo-Classical Approach:
I calculated the total cost of a loan, including all fees and interest, before deciding on
the best option.
 Behavioral Economics Approach:
I chose a credit card with a low introductory interest rate, underestimating the long-
term cost of high APR rates.

Principle 7: People Need to Feel Involved and Effective to Make a Change

For lasting behavior change, people need to feel empowered and capable of making an
impact. Overwhelming information or choices can lead to inaction.

 Neo-Classical Approach:
I switched to energy-efficient appliances solely based on long-term savings and
reduced bills.
 Behavioral Economics Approach:
I joined a community initiative promoting sustainable practices, driven by a sense of
personal contribution and collective impact.