People and policy: behavioural economics and its policy implications

The standard approach of economic modelling and policy analysis is to assume that people are homo economicus: a rational and self-interested economic man. However, a well-documented body of evidence suggests that human decision makers depart from this assumption in several interesting ways. This paper explores three key behavioural aspects – loss aversion; present-biased preferences; and social preferences. It considers the evidence to support them; how behavioural economists have modified economic models to capture the implications of each modification; and how they offer new insights on the scope and efficacy of a wide range of policy interventions.