Behavioral Economics Workshop – GIPE Day -2
The BSc Events Wing of Gokhale Institute of Politics and Economics conducted a Workshop on Behavioural Economics and Personal Finance. During the workshop, three speakers addressed the audience explaining the various aspects of Behavioural Economics and how it affects the personal finance strategies of individuals. One of the sessions of this workshop was dedicated solely to understanding the concepts of Game theory like Nash Equilibrium through various online games.
- Dr. Ashish Kulkarni,who is an Assistant Professor at GIPE introduced the concept of Behavioral Economics to kick start the workshop. He spoke about the various experiments conducted by famous behavioural scientists like Danniel Kanheman, Richard Thaler and Dan Ariely to name a few. Further, he explained the workings of behavioral economics in our day to day lives and elaborated on how our behavioural patterns are reflected in our spending patterns. Professor Kulkarni advised students to read books like Predictably Irrational, Misbehaving, The upside of Irrationality to name a few, to understand what behavioural economics is all about.
- Khushboo Srivastava, an alumna who completed her Masters from Gokhale Institute of Politics and Economics in 2021 was the second speaker. She spoke about concepts like Heuristics, Loss Aversion, Endowment Effect, Hedonic Adaptation and other behavioural tools like Nudge, Choice Architecture etc.
- Loss Aversion
The amount of pain suffered due to loss is often more than the happiness gained as a result of profit. The same phenomenon is observed amongst investors as Stop Loss is more famous than Target. Target Price is the price at which one can sell their stock to book profit before the stock experiences high volatility which leads to a higher risk. However, this feature isn’t used as often as Stop Loss because people don’t want to lose too much of their money.
- Hedonic Treadmill
Also known as Hedonic Adaptation talks about the tendency of humans to quickly return to the relatively stable level of happiness. It is often observed that people hardly ever save any money from their first income. The high level of excitement drives their cash flows and they end up buying things despite wanting to save some money. Soon after that their excitement level drops and the things they bought earlier provide them with that stable level of happiness. Similarly, when a person starts investing in the stock market, they monitor the volatility almost every day initially, until the excitement level drops. After that they look at the charts only once or twice a week.
- Endowment Effect
A human being gives more weightage to an object that he owns than something that is already available in the market. Thus, we see that while selling something (especially real estate), people always quote a price which is higher than the market price. This behavior is also observed when a person buys a stock and does not sell it even if the price starts falling after the purchase. This happens because the investor expects the price to go up in the near future and holds the stock, which goes against rational behavior.
- Our closing speaker was Peter Judodihardjo, a Youtuber. He graduated from the University of Warwick. He is a Behavioural Science Practitioner and he spoke about –
“Habit Formation – The key to achieving your long-term goals”
Achieving our long-term goals is not a knowledge problem. We are aware of the actions that should be taken. However, we tend to procrastinate and forgo our long-term goals for instant gratification. Good habits are the keys to avoiding procrastination. They allow us to march towards achieving such goals.
- Building a Habit requires 3 components, (i) Reward (ii) Cue (iii) Repetition.
- Reward includes the brain releasing dopamine (the pleasure chemical) to give you the satisfaction of participating in an activity. However, reward does not mean a monetary reward. It means the pleasure or the happiness resulting from a particular action. E.g. Runner’s High. When you earn rewards while or immediately after performing an action your brain associates the reward with that particular action.
- Cue is the trigger that prompts you to enter the environment of performing a habit. Every time one opens the door to leave the house he/she checks whether the fan has been switched off. Thus, opening the door becomes a cue for turning off the fan every time one leaves the house.
- Habit Stacking or Piggybacking means that you club two activities together, where the first activity becomes the cue for the next one. For e.g. studying for an hour immediately after brushing your teeth in the morning.
- Repetition allows the action to become a routine. Thus, less cognitive resources are required to perform the actions. Thereby becoming effortless.
- Habits and Routine are the key aspects of turning our goals into reality. The Study of Behavioral Economics puts emphasis on developing habits as a tool for success.
Peter ended his talk by mentioning a few resources:
A book titled “Good habits, Bad habits” by Wendy Wood,
A podcast “Choiceology” which talks about behavioral patterns and the economic decisions inspired by such patterns.