Marginalism and Incrementalism

Marginalism and Incrementalism
The most important task in any business is that of decision making, which can either
make or ruin the business. To ease this, various approaches are used in decision making.
These include marginal analysis and incremental analysis. Although they work hand in
hand, they have various differences.
What is Marginal analysis?
This is an analysis of additional benefits based on an activity in comparison to additional

costs incurred by the same activity. Marginal basically refers to the cost or benefit of
producing one more product or profit gained by adding one more worker. This is
commonly used by companies trying to maximize the profits by determining the effect of
minor changes to the whole business. It also helps in making a decision between two or
more investment options especially where funds are limited.
What is Incremental analysis?
This is a technique used in the determination of the true cost among alternatives in a
business. It is mainly important in short term businesses whereby major focus is put only
in opportunity costs and other relevant costs. This approach disregards any past costs and
sunk costs. Decisions such as whether to rebuild an asset, buy or produce goods and scrap
off a project off relies on incremental analysis reports.
https://theintactone.com/2019/06/27/be-u1-topic-7-market-forces-and-equilibrium-risk-
return-and-profits/
In real life we enjoy eating a piece of cake – sometimes even two or three – and avoid going for
a jog. In our work environment, we occasionally postpone work that should really have been
done today and sometimes we simply skip to compare accommodation prices for a business
travel. The same is true with our colleagues, customers, and employees.
Human decision making is not as rational as classical economic theories like to state. And
even though we know that, we often wonder why our well-designed theories do not turn
into the expected results.
This is why behavioral economics focuses on understanding decision processes - i.e., why
certain short cuts are being used, and which unconscious (psychological) factors can create
an advantage when it comes to guiding humans to their best behavior or to undertake a
desired action. All of this without reducing options and without removing freedom of
choice.
Debiasing and nudging are two methods within behavioral economics that can be applied to
assist decision-making. Debiasing is a way to proactively make people aware of irrational
distortions in their behavior (e.g. prejudices or biases) and helping them to make more rational,
objective decisions.
Nudging, on the other hand, is the targeted change of habits, internalized processes,
representations or formulations with the aim to discretely influence micro-decisions such as
choosing healthier foods or selecting less expensive hotel accommodation.
Nudging and behavioral economics can be applied to various use cases, for example:
 Increase employee or visitor compliance to save costs, reduce risks and decrease
reactance
 Nudge people to show more sustainable behavior at the workplace
 Increase diversity and recruiting quality by creating awareness for biases in the
recruiting process
 Improve objective decision-making in finance functions
 Support intended decisions and behaviors while avoiding employee or customer

reluctance
Moreover, apply behavioral economical insights to:

 Implement soft nudges instead of hard rules to trigger intended decisions and
behavior while avoiding employee or customer reactance
Did you know that Barack Obama and David Cameron were avid fans of nudging?
During their times at the White House and Downing Street, both Prime Minister David Cameron
and President employed nudge theory to improve domestic policies. In fact, David Cameron
even installed a so-called “nudge unit” that worked on using behavioral economics to bring
citizens to behave in a more socially adequate way. For that, the British Behavioral Insight Team
– as the “nudge unit” is officially called – took direct advice from the Chicago Professor Richard
Thaler who made the nudging theory popular and explored several ways to encourage citizens
based on market incentives and choice architecture rather than regulations.
Expensive petrol – use public transport
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Marginalism and Incrementalism

What is Marginal analysis?

This is an analysis of additional benefits based on an activity in comparison to additional

What is Incremental analysis?

 Nudge people to show more sustainable behavior at the workplace

 Support intended decisions and behaviors while avoiding employee or customer

Moreover, apply behavioral economical insights to:

Expensive petrol – use public transport

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