To understand how we interpret the world around us and how our environment influences our decisions, we must first understand how the mind works. Through numerous experiments, psychology professor Daniel Kahneman concluded that the mind operates through two distinct systems, and our decisions are shaped by whichever system is active.
System 1: The Automatic System
System 1 is fast, instinctive, and effortless. It allows us to make decisions quickly without spending much time or mental energy. Most of our daily activities come from this automatic system, such as checking our phones the moment we wake up, drinking coffee before breakfast, choosing the elevator instead of the stairs, or taking the shortcut home even when we know it is crowded.
These actions are habitual and require little thought—often influenced by repetition or by observing others around us. If someone asks you, “What is 2+2?”, you answer immediately without thinking, because System 1 is in control.
System 1 also governs immediate emotional reactions. For example, when a fire breaks out, the natural response is fear (and for most people, the instinct to run). But within moments, System 2 steps in.
System 2: The Reflective System
System 2 is rational, deliberate, and slower. It takes time to think, process information, evaluate choices, and reach a conclusion. We rely on it when making important decisions—paying bills, choosing a university major, or accepting a job offer. These situations require careful analysis.
System 2 helps us make calculated judgments—for example, slowing down while driving in the rain to avoid slipping. Its decisions are the result of conscious thought and logical evaluation.
Where Behavioral Economics Comes In
Behavioral economics combines psychology and economics to influence people’s behavior toward making better decisions. One of its key focuses is understanding human behavior and identifying the points that can be targeted to guide individuals toward beneficial choices.
Traditional economics assumes people rely on System 2, acting rationally and logically.
Behavioral economics, however, argues that people are not fully rational and primarily operate through System 1—which is automatic, emotional, and prone to biases.
Therefore, behavioral economics introduces interventions and tools that help shape decisions without restricting options. One of the most important tools is framing and information design—choosing the right words and presenting information in ways that guide people naturally. Examples include:
- Using appealing phrases in large retail stores
- Designing product displays to highlight items retailers want consumers to choose automatically
These interventions are simple, inexpensive, and non-restrictive. A well-known example is increasing students’ consumption of healthy foods in schools by placing healthy items at the beginning of the cafeteria line so they become the first—and easiest—choice.
Using Behavioral Insights to Improve Life
By understanding behavior across all areas of life—health, education, work, savings, and more—policymakers can design public programs that positively influence decisions. At the individual level, it is important to identify personal habits and behavioral obstacles that may lead to poor decision-making, and work on improving them to make better choices.
