Individuals make economic decisions for a variety of reasons and as a result of numerous factors. The study of the social, psychological, and emotional factors that cause a person to make economic decisions is known as behavioral economics; it focuses on why people and institutions make the economic choices they do, and why, if those choices are irrational, they do not follow the behavioral models that is otherwise predicted.
There are several principles of behavioral economics that stand out above others. First is the power of the concept of “free” – when consumers see even the word itself, it causes a release of dopamine; this makes consumers feel happier and increases the likelihood that they will behave in an unexpected or irrational manner. Second is the perception of quality with an increase in price; when consumers are exposed to two products, even if they are identical without the consumer knowing, they are more likely to rate the item perceived as more expensive in a more positive manner. If two glasses of wine are priced at $5 and $15, consumers are more likely to rate the latter as a better quality, even if they are unknowingly choosing between the same two wines with different price tags. Finally, the idea of too many options can actually reduce the likelihood that a consumer will make a purchase. If there are two models of televisions to choose from, consumers will evaluate them both and ultimately make a purchase. However, if there are ten models available, consumers are more likely to hesitate, unable to effectively evaluate them all to determine the best value, and ultimately purchase nothing. Despite there being a greater likelihood that their needs will be met perfectly by one of the available models, consumers are more likely to abstain from any purchases if there is too much variety. Understanding these concepts, and many others, that comprise behavioral economics allows for corporations and marketers to effectively understand and appeal to consumers.