Behavioral Economics
AdvancedBehavioral economics is a field of economics that studies how psychological, social and emotional factors affect people's economic decisions, often in ways that differ from the predictions of traditional models assuming fully rational behaviour.
Traditional economics often assumes people make rational decisions to maximise their own wellbeing, using all available information. Behavioral economics uses insights from psychology to show that people often rely on mental shortcuts, are influenced by how choices are presented, and struggle with self-control.
Key ideas include loss aversion, present bias, which is valuing immediate rewards too highly compared with future ones, anchoring, overconfidence, social norms and the effects of framing and default options.
For example, automatically enrolling employees in workplace pension schemes, while allowing them to opt out, has greatly increased participation in several countries, compared with requiring people to sign up actively. This is an example of a nudge.
Leading figures include Daniel Kahneman, Amos Tversky and Richard Thaler, with Kahneman and Thaler both receiving the Nobel Prize in Economics. Behavioral economics has influenced public policy, marketing and finance, where it is known as behavioral finance.
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