Why do all broadband deals include a lower price for the first 3 months? Why are people willing to pay more for travel insurance covering death from ‘terrorist acts’ than death from ‘all possible causes’? Why do people buy an annual pass to the gym, even though it would be cheaper to pay per visit? Insights from behavioural economics, a relatively new branch of economics, can help to answer such questions.
A fundamental assumption underlying almost all economics (except behavioural economics) is that people do what is in their best interest. This assumption is quite intuitive but not always true in reality. Research in behavioural economics has uncovered a large amount of evidence of inferior decision-making and identified situations in which people are more likely to behave irrationally. That is, to make decisions that are not in their best interest.
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