The Behavioural Tool Kit – What You Need to Know and Why Should You Care

Practice area: Behavioural Economics
Client: N/A
Published: 04 May, 2022
Keywords: behavioural economics

James Suter and Tiffany Head of London Economics’ Behavioural Team explain how behavioural economics provides many powerful insights on how people behave and why, with real-world applications in the worlds of business and policy making…

What is Behavioural Economics?

Behavioural economics is the study of human behaviour and how our ‘behavioural biases’ and the context in which we make choices (the so-called ‘choice architecture’) influence our decisions.

It is relevant to all kinds of decision-making, ranging from (seemingly) minor, everyday decisions like what to buy at the supermarket and whether to go to the gym, to major, infrequent ones like whether to accept a new job or get married. It has important implications and applications for a wide range of situations and issues, including how to improve peoples’ wellbeing; how to ‘nudge’ people to be good citizens; firms’ marketing, sales and customer interactions; consumer protection; policy and market regulation; and even deciding court cases.

At the core of behavioural economics is the finding that people are not rational in the way that traditional economic theory assumes.

Want to know how traditional economists think you think? Well, it’s like this:


This is an actual equation describing how people make choices from a paper in the Journal of Economic Literature[i]Clear? Does that sound like you? No, we thought not.

Acting ‘rationally’ means weighing up different alternatives, using the information available and processing it appropriately, before choosing the one that maximises our ‘utility’ (i.e., our happiness and satisfaction).

In reality, we do not behave like this. We are impulsive, emotional, impatient, don’t think things through, don’t process information well, and are attracted to pretty, shiny, brightly coloured things. Behavioural economics recognises that the idea of making fully rational choices is unrealistic. It is more sensible to see people as ‘predictably irrational[ii] where our decision-making is affected by ‘biases’ (systematic deviations from rationality) and we use ‘heuristics’ (mental shortcuts).

In short, behavioural economics is about making sense of how people actually behave; and it provides many, many insights into this. These insights have coalesced in various behavioural economic theories, such as Daniel Kahneman and Amos Tversky’s seminal work on ‘prospect theory’, and the work of Richard Thaler, which resulted in Nobel Prizes in economics in 2002 and 2017 respectively. Here we give just a few examples of the vast range insights from behavioural economics then, below, discuss how behavioural economics is useful for companies, regulators, government and civil society:

Following the crowd

Suppose you’re looking for a place to eat. If you are like most people, you’ll choose the restaurant that’s bustling and full of customers over the one that’s nearly empty. That’s ‘social proofing[iii]. We tend to follow the actions or opinions of other people. This is why it is effective to market products as “best sellers” or to say “people bought X also bought Y”? Tax authorities have also used social proofing to encourage people to pay their taxes on time, using language in tax reminder notices that pointed out most people paid on time[iv].

The ‘marvels of priming’

Our decisions are affected by things we see and hear, before making choices. This is referred to as ‘priming’. For example, Daniel Kahneman summarises of a number of intriguing studies which found, among other things, that people physically slowed down after being exposed to words associated with being elderly, people exposed to images of classrooms and school lockers had a higher tendency to support a school initiative, and ‘money-primed’ people were more selfish[v]. In the real world, this is why certain pricing techniques are so effective. For instance, consumers ‘anchor’[vi] on the first piece of information they receive and use it as a reference point, whether or not it is relevant, meaning that price tags such as “Was £199 … Now £99!” make products seem cheap irrespective of whether paying £99 is actually a good deal.

Now or never

Ever said to yourself “I’ll just indulge this one last time and start the new healthy lifestyle tomorrow”, then when tomorrow comes around you said the same thing again? That’s present bias[vii], the bias that makes small pleasures and payoffs in the here and now much more desirable than larger ones experienced in the future. Present bias makes the effort of going to the gym loom very large in people’s heads, but makes them optimistic about their gym attendance next week… or next month… or next year…

Sticking to the status quo

People tend to stick with the default choice, because of something known as the status quo bias. If you’ve ever done something in a certain way just because that’s how you’ve always done it, that’s an example of status quo bias. For example, when people need to ‘opt-in’ to donating organs, around 15% actually do so. But when the default is switched so people have to opt out of donating organs, less than 5% do so[viii].  Switching the default could save thousands of lives.

And how can it be useful?

Behavioural economics is useful not only for understanding our own behaviour, but also for understanding why consumers or firms behave the way they do. This gives businesses, industries, and policy makers an advantage in understanding and leveraging behavioural trends.

Our Behavioural Economics team at London Economics unlocks these behavioural insights and create effective solutions around them. We combine wide industry experience and the latest insights from behavioural science to help organisations achieve their goals across both the public and private sectors. Whether that be analysing customer journeys and market practices, helping businesses optimise the way they engage with customers, or helping policy-makers craft better interventions; behavioural economics can deliver insights where conventional techniques cannot.

How behavioural economics is useful for businesses and organisations

Behavioural economics has important implications and applications for businesses. As human beings, customers are irrational and strongly influenced by their emotions, so understanding what this means for customer behaviour is crucial in any sector. Why do consumers make the purchases they do, what affects their preferences, why do they select one product over another, what impacts brand loyalty? As behavioural economists, we can help companies to help to answer such questions.

For example, we have worked with a water company to help understand how to get its customers to conserve water; we have helped banks to devise ways to get their customers to use online channels; and we have worked with an insurer to understand how customer communications impact on renewal behaviour. The key to all such projects is a deep knowledge of the behavioural science and behavioural economics literature and ability to apply the insights, combined with the ability to undertake sophisticated analysis. Below we set out the behavioural economist’s ‘tool kit’ in more detail.

To give just one example of how behavioural economics can be used, considering the objective of building customer loyalty. Personalisation[ix] and rewards make customers feel more connected to a product or company, for example offering “VIP status” to customers that have spent a certain amount. Reward schemes also build loyalty by developing a sense of reciprocity[x] and once a good customer relation is established loyalty will be reinforced by the endowment effect[xi] and loss aversion[xii] which mean that consumers do not want to give up that relationship.

The behavioural economist’s ‘tool kit’

Key methods in the behavioural economist’s ‘tool kit’ include:

  • Behavioural mapping, analysis and diagnosis of the customer journey. This can, for example, help companies understand the behavioural divers and barriers to particular consumer decisions, such as whether or not to make a purchase, upgrade or switch. For policy makers and regulators, this can shed light on online ‘sludging’ practices or sales practices that may lead to consumer harm.
  • Behaviourally informed design. This could mean working with companies to design the ‘choice architecture’ of customer interfaces or customer communications, or working with regulators to devise effective ways to ensure consumers are well informed and able to make good decisions for themselves.
  • Product design. For example, we helped a competitor bank test features of their innovative product with a representative customer base prior to market launch. We used behavioural science to help the client refine its product features and decreases risks during market launch.
  • Testing and trialling behavioural interventions or policy options. For companies, this can include trials to examine how (new, behaviourally informed) customer communications impact on choices, whereas for policy makers this can allow them to test-run proposed market remedies.
  • Sophisticated econometric and AI data analysis. Vast amounts of data is often held on the decisions made by individuals (e.g. customers) in the real world. Sophisticated econometric and machine learning data analysis techniques can reveal insights and patterns from this data, which can then to be linked back to behavioural theory to provide compelling arguments and actionable insights.

How behavioural economics is useful for public policy

The word ‘nudge’ in this context is “any aspect of the ‘choice architecture’ that alters people’s behaviour in a predictable way without taking away any options or significantly changing their economic incentive”[1]. It does not seek to persuade people to take certain actions but alters their choice environment such that, when they follow their instincts and rely on their mental shortcuts (or ‘heuristics’), they are more likely to take the option that is better for their own welfare and that of society.

We have all experienced the temptation of grabbing a chocolate bar while we are waiting in line at the checkout in the supermarket. What would happen if instead our eyes were drawn to the healthier snacks? One experiment tested exactly that, and found repositioning just 13 healthier snacks to the checkout resulted in 50% more sales.[xiii] This is a nudge in practice. A policy to ban junk food is not a nudge, but keeping healthier foods in places with a higher likelihood they will catch people’s attention is.

Our team at London Economics uses behavioural concepts and conducts experiments to help policy makers gain a deeper and more realistic understanding of how consumers behave, what affects their understanding of markets, their behaviour, and welfare impacts compared to more traditional consumer research methods. Policy experiments can then enable policy makers to identify how and why market practices may negatively impact consumers and to pre-test potential remedies. The findings from policy experiments support evidence based policy making and have been widely used by national regulators and EU level organisations to improve the functioning of markets.


In conclusion, behavioural economics provides many powerful insights on how people behave and why, which have real-world applications, including in the world of business and policy making. By harnessing these, companies and governments can gain an advantage in meeting their various objectives.


James Suter is Divisional Director of London Economics’ Behavioural Team and leads studies with a focus on consumer behaviour and consumer protection. He has more than 10 years of consulting experience and specialises in the understanding of consumer behaviour, behavioural science, cognitive biases and nudge theory. He can be reached at: [email protected]

Tiffany Head is an Economic Analyst in London Economics’ Behavioural Team with experience in economic analysis, Excel modelling and literature reviews. Since joining LE, she has worked across various teams including the Finance, Trade and Behavioural team and advises national governments and regulators, international organisations and private companies across various sectors from finance to e-commerce on using behavioural economics. She can be reached at: [email protected]


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[i] DellaVigna, S. (2009). Psychology and Economics: Evidence from the Field. Journal of Economic Literature, 47(2), pp. 315-372.

[ii] Ariely, D. (2008). Predictably irrational: The hidden forces that shape our decisions. New York, NY: Harper.

[iii] Cialdini, R. B. (2007). Influence: The Psychology of Persuasion. New York: Harper Collins. DellaVigna, S. (2009). Psychology and Economics: Evidence from the Field. Journal of Economic Literature, 47(2), pp. 315-372.

[iv] Sunstein, C. R. (2014, April 15). Nudging Taxpayers to Do the Right Thing. Bloomberg.

[v] See chapter 4, ‘The Associative Machine’, of Daniel Kahneman’s book ‘Thinking, Fast and Slow’.

[vi] Tversky, A. and Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases. Science, 32(5), pp. 1124-1131.

[vii] Thompson, D. (2012, January 13). This Is Why You Don’t Go to the Gym. The Atlantic.

[viii] Johnson, E. J. and Goldstein, D. (2003). Do Defaults Save Lives? Science, 302(5649), pp. 1338-1339.

[ix] Douglas, K. (2015, February 9). How South Africa’s top e-commerce store wins customer loyalty. How We Made It in Africa.

[x] Cialdini, R. B. (2007). Influence: The Psychology of Persuasion. New York: Harper Collins. DellaVigna, S. (2009). Psychology and Economics: Evidence from the Field. Journal of Economic Literature, 47(2), pp. 315-372.

[xi] Kahneman, D., Knetsch, J. L. and Thaler, R. H. (1991). Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives, 5(1), pp. 193-206.

[xii] Kahneman, D.; Tversky, A. (2000). Choices, Values, and Frames. Cambridge University Press.

[xiii] Van Gestel, L., de Ridder, D. and Kroese, F. (2017) Nudging at the checkout counter – A longitudinal study of the effect of a food repositioning nudge on healthy food choice, Psychology and Health