Behavioural economics is defined as: human understanding for business advantage.
Previously, classical economics was based solely on logic.
Believing all human decisions were dictated by rational behaviour.
The ultimate rational behaviour was tangible reward.
The ultimate tangible reward was money.
So in classical economics all decisions were based on reason and money.
The flaw being that human behaviour isn’t always reasonable.
Often it’s emotional.
And emotion can’t be predicted by cold, dry logic.
The behavioural economics example of this is the ultimatum game.
The first player is given a sum of money.
He or she must give some of the money to the second player.
If the second player accepts what they’re given, both players can keep the money.
If the second player refuses, both players lose all the money.
According to logic, the second player should accept whatever amount they’re given.
Because they started with nothing, so any amount is more than they previously had.
In practice, this isn’t what happens.
If the second player feels the amount they’re given is too small, they feel insulted.
They want to teach the first player a lesson.
So they refuse the amount, and both parties lose everything.
This is where behavioural economics parts company with classical economics.
Say the first player is given £10 and gives the second player £1.
The second player is £1 better off.
Therefore, logically, they should accept it.
But behavioural economics finds the second player is likely to refuse anything less than 30%.
The decision isn’t logical: "I will lose something."
The decision is emotional: "They are treating me badly – I will show them."
On the radio recently, I heard several behavioural economists describe this as the case with Brexit.
The urban elite behaved like classical economists.
They couldn’t believe someone would choose something logically contrary to their financial interests.
So they refused to even discuss it.
This attitude was summed up several years ago by Gordon Brown’s televised gaffe.
An old lady asked him what he planned to do about immigration.
He ignored her question and got into his car.
Without realising his microphone was still switched on, he said she was just an old bigot.
Confirming on the national news what the working class feel about the way they are treated.
The Brexit vote was the culmination of years of frustration.
Those voters felt insulted and ignored.
So they behaved like the second player in the ultimatum game.
They voted emotionally instead of rationally.
If we want to learn it, there’s a lesson there for us.
We are the urban elite.
We live inside an echo chamber.
The lesson for those of us in mass media is that we need to stop surrounding ourselves with people who think like us.
It will make us lazy, complacent and, worst of all, ineffective.
Dave Trott is the author of Creative Mischief, Predatory Thinking and One Plus One Equals Three
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