By Aparna S
March 4, 2025: In ancient Greece, King Midas wished for the golden touch, believing that unlimited wealth would bring him ultimate happiness. However, his dream quickly turned into a nightmare when his food—and even his beloved daughter—turned to gold.
Midas became trapped by his irrational desire, blinded by the allure of wealth without considering its consequences.
Fast forward to today, and not much has changed. While we may not be turning loved ones into gold, we still make questionable financial decisions—like buying a $2,000 phone just to doomscroll on social media or paying for gym memberships we never use. Just like Midas, our choices are often driven by emotions, biases, and flawed logic.
This is where behavioural economics steps in.
Unlike traditional economics, which assumes humans are rational beings making perfectly logical decisions, behavioural economics embraces the messy truth: we are emotional, inconsistent, and frequently irrational. It explores why we fall for marketing tricks, struggle to save money, and repeatedly believe in get-rich-quick schemes that never work.
How do you make a financial decision?
Behavioural economics blends traditional economic theories with psychological insights to understand how people make financial decisions.
Contrary to conventional economic models that assume individuals carefully weigh costs and benefits before acting, behavioural economics acknowledges that real-world behaviour is far more complex. People procrastinate, overspend, and succumb to impulsive purchases instead of logically calculating every decision. Behavioural economics seeks to explain these inconsistencies by examining how psychological factors influence decision-making.
Herbert Simon, a pioneer in the field, argued that humans have cognitive limitations and cannot process all available information to arrive at rational conclusions. Instead, we rely on “mental shortcuts” or heuristics that often lead to suboptimal outcomes. For example, Daniel Kahneman and Amos Tversky’s Prospect Theory demonstrate that people are more sensitive to losses than equivalent gains—losing $100 feels far worse than gaining the same amount.
Behavioural biases
First impressions often dominate our decision-making—even when they’re misleading. People tend to rely heavily on the first piece of information they encounter (the “anchor”) when making choices. This explains why a product marked down from $100 to $50 feels like a great deal—even if its actual value is only $25.
These principles are increasingly applied in public policy and financial planning. By understanding behavioural biases, policymakers and financial strategists can design better investment plans that anticipate emotional decision-making and risk aversion.
Toilet paper for years
Remember the early days of COVID-19 when supermarket shelves were stripped bare?
This collective irrationality was fueled by a perceived threat—a global pandemic or economic crisis—that created a sense of lost control. Stocking up on essentials became an unconscious way to regain control and feel safe.
According to the scarcity heuristic (Lynn, 1991), people are more likely to buy items perceived as scarce—regardless of actual need.
Similarly, the availability heuristic explains how vivid images of empty shelves in news reports or social media amplified the urge to stockpile. No wonder some households ended up with enough toilet paper for years!
A love child
While behavioural economics offers valuable insights into human decision-making, it has its flaws. The field can be inconsistent and overly context-specific. Additionally, focusing too much on cognitive biases without considering broader social and cultural influences may lead to incomplete conclusions.
So, are we doomed to repeat King Midas’ mistakes? Not necessarily—now that we understand the “tricks of the trade.”
Behavioural economics is the lovechild of psychology and traditional economics, born from the realization that emotions drive irrational choices.
It offers powerful insights into how irrational decisions shape markets, policies, and personal finances. By understanding the psychology behind our actions, we can learn to outsmart our irrational minds—or at least avoid buying gadgets we don’t need.
(Dr Aparna S is a consultant psychiatrist and an Assistant Professor at the Believers Church Medical College Hospital, Tiruvalla, Kerala. Views expressed are her own and not of an organisation or company.)
