Applying Behavioural Economics to Firms

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It is widely accepted that consumers are boundedly rational, due to their cognitive limitations and behavioural biases. However, less is known about why firms may not be fully “rational” in an economic sense. In this article, we focus on firm behaviour, exploring (i) the reasons why we should care about it, (ii) the current status of knowledge on the subject and (iii) the models and technical tools that can be used to analyse it. Behavioural economists talk a lot about the design of “choice architecture” – and this article takes us into the realm of “market architecture.” We draw out its implications for policymakers and nudge practitioners, using applied behavioural industrial organisation (Behavioural IO) case studies. Last, we explore the how firms may not ‘rationally’ pursue their environmental objectives; and why tackling this is important for society.