ABSTRACT
Chapter 4 deals with behavioral economics as policy tools. As a result of behavioral biases, people fail to satisfy well-defined preferences. Public policy is directed at better preference satisfaction. Behavioral economics is fundamentally concerned with the questions of how people actually behave in decision-making situations and how their choices can be improved so that their welfare is enhanced. Preferences are affected by whether the decision problems are framed in terms of gains or losses. A framing effect is said to be present when different ways of describing the same choice problem change the choices that people make. Systematic biases lead to poor choices. There is a scope for policymakers to correct the cognitive shortcomings. Nudges are designed to effect behavioral change on people. Nudges tend to involve relatively small additions or changes to the decision environments that encourage, but do not force, changes in behavior.
