Professor Joo Jae-Woo at the School of Business Administration was interviewed about behavioral economics at KBS1 for four weeks from Feb. 9. He introduced four concepts with cases, including heuristics, choice architecture, and mental accounting.

1. What is behavioral economics? How does it differ from mainstream economics?

 Behavioral economics combines behavior, which refers to psychology, and economics. First of all, economics is a normative study, and psychology is a descriptive one. That is, economics usually suggests the norm of people’s behavior and the act based on the norm. However, from the perspective of psychology, many cases deviate from the norm; a typical example is when one makes a decision that does not match
one’s preference. Behavioral economics acknowledges and closes this gap. Mainstream economics suggests the reasonable decision-making of human beings. However, human beings sometimes behave outside of reasonable decision-making, which behavioral economics studies irrational decision-making.

2. You called behavioral economics a prescriptive study. Please explain this.

 As I mentioned, economics is a normative study and psychology is a descriptive one. Behavioral economists prescribe circumstances by widening or narrowing gaps between economics and psychology. Metaphorically speaking, behavioral economists are pharmacists and they prescribe pills depending on symptoms.

3. On the radio, you said products or services based on behavioral economics would be released soon. What kind of products will these be?

 One representative example is application. On the Netflix application, it’s about deciding how many content videos should be shown, how to recommend what to watch, etc. The same goes for the Airbnb app: How to organize tests by theories. If it’s proved that people tend to click more on a specific location, it leads to corporate profits. Giant tech companies such as Uber, Netflix, Youtube, Meta, and Amazon are already holding out experiments, encouraging people to make certain choices. So, behavioral economics benefits companies overseas as they can make more money. In addition, people use behavioral economics for different purposes in the same mechanism. For example, by the same mechanism, while some use the economics on Netflix to increase ratings, others use it on at-home workouts to reduce the use of digital devices.

4. In your first week on the radio, you defined heuristics as a mental shortcut for decision-making. What is a heuristic? What are examples of the advertising or marketing heuristics used?

 Heuristics are mental shortcuts. That is, using heuristics, we can make decisions quickly without having to engage in complex thinking. Some researchers say that heuristics can turn on and off. People are cognitively lazy, which means people feel bored and tired from thinking deeply about every decision, leading all human beings to have heuristics. A GPS navigation device is a good example of a heuristics. When
figuring out how to get to a distance on a map, we have to identify all routes and make the best decision. However, with a GPS navigation device, we can find the best route without having to think about it. There are too many examples of heuristics to count because people see the world in heuristics. For instance, when people see “Made in China,” they think it is the default. By countering this heuristic, Apple embeds “Designed in California” on all Apple products. Another example is the screen on the ATM. When ATM asks us about voice phishing, people want to pass it quickly. In this situation, making the button red or placing it on the left makes people pause for a moment and think before they choose to put it. This is how heuristics can be turned off.

5. What is a nudge you introduced in your second week on the radio? Is nudging different from behavioral economics? Or how are they related? How can we guide people to make certain decisions by using nudging?

 Nudge, a book written by Richard Thale, introduces choice architecture visually. Choice architecture is when the founder offers many options from which people can choose, but people make the decision founder wants and induce. That is, without infringing on people’s freedom, we can achieve the desired result using choice architecture. The limitation of choice architecture, however, is that it does not consider the intention of people, or what people want to do.

6. What is the mental accounting that you introduced in your third week on the radio? How can we use mental accounting to save money?

 Mental accounting refers to the different values a person places on the same amount of money, based on subjective criteria, often with detrimental results. There is a concept of account . It means the category people allocate their budget. Depending on the account, people decide whether they buy it or not, whether they spend more money or less. The core of mental accounting is that people avoid breaking accounts because pot breaking is painful, which means, doing so spends psychological costs. So, people try to keep pots. Thus, as they
make many accounts, they can save money easily. Mental accounting is one of the most interesting research areas heavily driven by Professor Dilip Soman at the University of Toronto.

7. You explained three steps for achieving self-management and goals. Could you introduce the steps one by one?

 Among many prescriptions, I picked three to help people make progress in the beginning-middle-end structure. Everything is difficult in the beginning, as the proverb “Well begun is half done” alludes to. But there are ways to make it easier to start something. If you need to collect 10 stamps in a coupon card, for example, all of the blank spaces may make you reluctant to start. But adding two more blanks and stamping them by yourself would lead you to naturally start from the third blank, making you feel like you've already achieved three tasks out of twelve. This removes some of the burdens of starting such a task. Next is the middle step. Most people don’t keep track of how much they've done toward reaching their goals, so they tend to give up too easily. To prevent this, checking progress is essential. Also, people like the
feeling of moving forward and monitoring their progress with their own eyes. There is a study that was done on how people feel regarding the distance traveled by airplane. The researchers had subjects choose between two flight routes from China to the United States. One was a direct flight going backward and the other was a stopover going forward. Even though the former route took a short time, people were more likely to choose the latter route. This is because they were tricked by the visual effect, which made them think it would be a loss to move backward. The same logic applies to electronic signs in airports and delivery tracking services. If progress is presented visually, it keeps people motivated. The last step is the ending. In this stage, people should use the concept of sunk cost, which refers to a cost that cannot be recovered once it has been incurred.
After having put a lot of time and effort into something, it would be a waste to quit. Sunk cost discourages people from giving up since the goal is just around the corner.

8. Behavioral economics seems to be tilted toward psychology. I wonder how close the field of study is to economics.

 That's understandable. Behavior economics indeed started from economics, but the study focuses on the behavior of people who deviate from economics. That's why it's inseparable from psychology. The essence of economics is the consistency between preference and choice. You choose because you like it. But, in reality, you do not choose when you like it. Let me take an example. If people agree to donate blood, they should donate blood. Yet only a few do so. Behavioral economics finds ways to narrow this gap.

9. Are there any courses on behavioral economics?

Note that behavioral economics has a short history. I do not know of any course in my school yet. If you’re interested, you can take my class Consumer Behavior . In this class, we work on team projects. We collaborate with a company to nudge people to avoid using plastic cups, throwing cigarette butts in trash cans, and even buying products through their Kakao accounts.

10. Could you recommend another book except for Nudge?

 I recommend any book written by Dilip Soman. Since he is an expert in mental accounting and runs numerous field research projects, he shows a big picture of behavioral economics. If you are looking for books for beginners, check out Dan Ariely. He lectured on an EBS TV show, Great Minds about the psychology of money. Another top author is Daniel Kahneman. He was the first person to start behavior economics. You should read books by these three authors in well-translated versions or original books.

11. Everything is so expensive these days, but we continue to spend money. As an economist, what is your advice for KMU students in this environment?

 You should be aware of how much money you are spending. Once you spend money without restraint, your expenditures will be out of your hands. For example, there was a daycare center where some mothers were picking up their babies from daycare much too late in the evening. To solve this problem, the head of the daycare center made the mothers pay a fine if they came late. The result was that the mothers continued to come late and just paid the fine without any guilt. If people lose their self-control and only use money, it's difficult to get back to their original state. In addition, you need to know yourself well. Many people who subscribe to video streaming platforms such as Disney+, Netflix, and YouTube Premium don’t watch as much content as they expected to, leading them to regret spending so much money on subscriptions to such platforms. This kind of failure is called a prediction error. People will only use the services that suit them and reject all other options. In conclusion, you need to understand yourself well so that you can effectively choose the services to which you will subscribe and save money.
 

Kang Hyun-Jin, Yoon Sang-Jung
Reporters

hyunjinkang1228@kookmin.ac.kr
ann8959@kookmin.ac.kr