Behavioral Economics Revisited: Nudges, the Decoy Effect, Hyperbolic Discounting, Veblen Goods and the Savanna Principle

People are not calculators

Traditional economics assumed people weigh all the information and choose whatever benefits them most. Behavioral economics studies the systematic patterns in which real people don’t behave that way. Loss aversion and choice overload are covered in the article on loss, ownership and choice, so here we read the other famous concepts alongside their original and follow-up research.

Nudges: changing direction without removing options

In Nudge (2008), Thaler and Sunstein used the term for ways of helping people make better decisions by changing how choices are presented (choice architecture), without banning or forcing any option.

The best-known example is the default. Johnson and Goldstein (2003) showed that organ-donor consent rates differ hugely between countries where you are in unless you opt out and countries where you must opt in.

Follow-up research is more cautious. A meta-analysis of more than 200 studies reported a sizeable average effect for nudges (Mertens et al., 2022), but a reanalysis of the same data soon found that the effect largely disappears after correcting for publication bias (Maier et al., 2022). Some nudges, like defaults, have clear effects, but it is hard to say that all nudges work.

The decoy effect: an option no one picks changes the decision

Huber, Payne and Puto (1982) showed that adding a third option clearly worse than one of two alternatives increases the share of people choosing that alternative. This is the decoy (asymmetric dominance) effect.

Ariely’s (2008) magazine-subscription example is famous: offered “web only $59, print only $125, print and web $125,” far more people chose print and web. The “print only” option, which nobody chose, served as the benchmark.

But Frederick, Lee and Baskin (2014) reported that the effect weakens or vanishes when options are shown as pictures or real products rather than numbers. It is strong in tidy lab tables but may be weaker than expected in messy real-world choices.

Hyperbolic discounting: the present looms too large

Between $100 today and $110 in a year, many people choose today. Yet between $100 in five years and $110 in six, many choose to wait. The gap is the same year, but the nearer the future, the more the wait weighs on us. This discounting curve is called hyperbolic discounting (Ainslie, 1975; Laibson, 1997).

That is why “I’ll start saving next month” wobbles when next month arrives. The solution research suggests is binding yourself in advance. When a Philippine bank offered a savings account that couldn’t be withdrawn before a target, people who signed up had substantially higher savings a year later (Ashraf, Karlan & Yin, 2006). Automatic transfers work the same way: they don’t leave the choice to your future self.

Veblen goods: buying because it’s expensive

In The Theory of the Leisure Class (1899), the economist Veblen called spending done to display status rather than for use conspicuous consumption. Goods like luxury items that sell better as prices rise are called Veblen goods. Bagwell and Bernheim (1996) used an economic model to explain the conditions under which this happens.

The concept helps explain “why a high price becomes an attraction.” It also prompts you to ask whether you are buying something for its use or to be seen with it.

The savanna principle: an old brain in a new environment

Kanazawa (2004) proposed the savanna principle: the human brain struggles to understand situations that did not exist during our evolution. He used it to explain, for example, why people feel TV characters are real friends.

A similar but more widely accepted idea is evolutionary mismatch: tendencies shaped by our long evolutionary environment clash with modern conditions and cause problems, the craving for sweet food being a classic example (Li, van Vugt & Colarelli, 2018). Many of Kanazawa’s claims, however, have drawn methodological criticism. Evolutionary explanations are best used as a starting point for hypotheses, not as conclusions in themselves.

Summary at a glance

Concept	The first story	After follow-up research
Nudges	Change the design and behaviour changes	Defaults are strong; the average effect is debated
Decoy effect	One decoy changes the choice	Strong in number tables; can weaken in real life
Hyperbolic discounting	People overvalue the present	Field studies show commitment devices help
Veblen goods	The pricier, the better it sells	Explained by status signalling under some conditions
Savanna principle	The brain can’t understand modern life	Evolutionary mismatch is a useful hypothesis, not a verdict

If you’re curious about your own economic thinking, try OIYO’s economics school test too.

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References

• Thaler, R. H., & Sunstein, C. R. (2008). Nudge: Improving Decisions about Health, Wealth, and Happiness. Yale University Press.
• Johnson, E. J., & Goldstein, D. (2003). Do defaults save lives? Science, 302(5649), 1338–1339.
• Mertens, S., Herberz, M., Hahnel, U. J. J., & Brosch, T. (2022). The effectiveness of nudging: A meta-analysis of choice architecture interventions across behavioral domains. PNAS, 119(1), e2107346118.
• Maier, M., et al. (2022). No evidence for nudging after adjusting for publication bias. PNAS, 119(31), e2200300119.
• Huber, J., Payne, J. W., & Puto, C. (1982). Adding asymmetrically dominated alternatives: Violations of regularity and the similarity hypothesis. Journal of Consumer Research, 9(1), 90–98.
• Ariely, D. (2008). Predictably Irrational. HarperCollins.
• Frederick, S., Lee, L., & Baskin, E. (2014). The limits of attraction. Journal of Marketing Research, 51(4), 487–507.
• Ainslie, G. (1975). Specious reward: A behavioral theory of impulsiveness and impulse control. Psychological Bulletin, 82(4), 463–496.
• Laibson, D. (1997). Golden eggs and hyperbolic discounting. Quarterly Journal of Economics, 112(2), 443–477.
• Ashraf, N., Karlan, D., & Yin, W. (2006). Tying Odysseus to the mast: Evidence from a commitment savings product in the Philippines. Quarterly Journal of Economics, 121(2), 635–672.
• Veblen, T. (1899). The Theory of the Leisure Class. Macmillan.
• Bagwell, L. S., & Bernheim, B. D. (1996). Veblen effects in a theory of conspicuous consumption. American Economic Review, 86(3), 349–373.
• Kanazawa, S. (2004). The savanna principle. Managerial and Decision Economics, 25(1), 41–54.
• Li, N. P., van Vugt, M., & Colarelli, S. M. (2018). The evolutionary mismatch hypothesis: Implications for psychological science. Current Directions in Psychological Science, 27(1), 38–44.