Behavioral economics

Behavioral economics is a field of economics that studies the effects of psychological, cognitive, emotional, cultural and social factors on the economic decisions of individuals and institutions and how those decisions vary from those implied by classical theory.

Overview

Behavioral economics is primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology, neuroscience and microeconomic theory. The study of behavioral economics includes how market decisions are made and the mechanisms that drive public choice.

History

The use of the term "behavioral economics" in U.S. scholarly papers has increased in the past few years, as shown by a recent study.

Key Concepts

Bounded Rationality

Bounded rationality is the idea that when individuals make decisions, their rationality is limited by the available information, the tractability of the decision problem, the cognitive limitations of their minds, and the time available to make the decision.

Heuristics

Heuristics involve mental shortcuts and approximations that can improve decision-making efficiency, but sometimes lead to systematic errors.

Framing

Framing refers to the way an issue is presented can significantly affect decisions and judgments.

Market Inefficiencies

Market inefficiencies are often identified through the study of behavioral economics, such as mis-pricings and non-rational decision making.

Applications

Behavioral economics has been applied to intertemporal choice, which is defined as making decisions about what and how much to do at various points in time, when choices at one time influence the possibilities available at other points in time.

See Also

• Cognitive bias
• Prospect theory
• Loss aversion
• Mental accounting
• Endowment effect

References

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