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The Financial Express

Behavioural economics and the trap of 99


Behavioural economics and the trap of 99

It is often seen that grocery stores or shops are selling their products at a price that ends with the number 99.

For instance - ‘1 to 99’ gift stores are ubiquitous and the question arises, why would they sell their products for Tk 99 rather than Tk 100? It is because there are numerous behavioural fallacies that we encounter in our daily lives.

This allows the shopkeepers to manipulate the customers into believing that their products are inexpensive. It is simply a case of what is known as the ‘anchoring effect.’

It occurs when someone places too much reliance on an initial piece of information and fails to properly assess the entire issue. It makes the product appear cheaper than it actually is and this pricing strategy, known as ‘anchoring’ in behavioural economics jargon, helps to make the product more appealing to the customer.

And this whole process is a part of behavioural economics - economic analysis to explain human behaviour while making economic decisions.

Nudging people to get vaccinated

An interesting strategy taken by the National Football League (NFL-NFLPA COVID-19 Protocol) in America does not require players to be vaccinated, though it does provide plenty of incentives for doing so.

Unvaccinated players must be tested daily, be masked and kept isolated from teammates on flights, and remain in their accommodation until game day.

Players who have been vaccinated and test positive, but are asymptomatic, can return to duty after two negative tests separated by 24 hours. Unvaccinated players, on the other hand, must spend 10 days in separation.

Abiding by the extreme rules set for the unvaccinated players might be exhausting, thus nudging or influencing the players to get vaccinated soon.

These incentives came after a sustained campaign to inform athletes about the benefits of vaccination for themselves, their families and their teammates. At least ninety per cent of the league's players have been given a jab at least once.

The possibility that a team will lose a game due to an unvaccinated player's absence produces a strong group dynamic.

However, nudges are unlikely to save the world in a broader aspect, but we should applaud economists who are able to make a tangible difference in real-world policy

Free tags or free gifts

Free tags or free gifts with purchase are frequently seen at shopping malls. This strategy can be explained by one of the major principles in behavioural economics, the prospect theory.

It demonstrates that people are prone to making biased decisions in order to prevent losses rather than obtain an equal amount of money. Separating profits from collective losses, according to the notion, is preferable.

Businesses regularly use the strategy of giving away free stuff in exchange for specific purchases, for example, ‘buy 1 get 1’ offers give away unsold goods with the latest ones being sold and people are more likely to spend more on such offers.

Money illusion

Individuals tend to calculate their money in terms of its numerical value rather than in terms of its purchasing power.

For instance, people continue to use their credit cards for their frequent shopping trips. They enjoy using credit cards since it allows them to accumulate their losses. These people incur losses when they pay the bill at the end of the month rather than on each transaction.

Due to being entrapped in a money illusion, individuals are likely to ignore the real value of money and spend more via credit cards. This is because unless they pay back a credit card purchase instantly, they will not be able to feel the pain of the bill for a month.

Therefore, behavioural economics depicts how people act in a given market. Nevertheless, this understanding does not imply that we have learnt something basic about human behaviour.

The choices people make in the market reflect their growing opinions that lead to suitable behaviour in that specific context.

A distinct environment with various clues results in a different response. Even little changes to the environment will influence people's decisions about what they should and should not do in the market.

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