Behavioral Economics - Explained
What is Behavioral Economics?
Written by Jason Gordon
Updated at March 26th, 2023
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What is Behavioral Economics?
Behavioral Economics is a branch of economics that studies the impact of psychology on the decision-making traits of consumers. Seeking to connect psychology and economics, this field of economics studies how cognition, emotion, and psychology of humans and institutions affect their economic decisions. Given the effects of psychology on individuals and organizations, their economic decisions vary from those expected by classical theory.
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How does Behavioral Economics Work?
Economists who have notable works in behavioral economics are Daniel Kahneman (The illusion of validity, anchoring bias; 2002), George Akerlof (Procrastination; 2001), Herbert Simon (Bounded rationality; 1978), and others.
Behavioral economics seeks to answer whether assumptions of utility is a way to approximate the economic behavior of individuals and whether individuals are able to fully maximize subjective expected utility. Behavioral economics also evaluates the tendency of people and organizations to make decisions that are not in their best interest given the influence of emotions.
What is the Rational Choice Theory?
In rational choice theory, individuals have the tendency of making economic decisions that aim to maximize their satisfaction when presented with various options. According to the rational choice theory, a rational person is one that has cognitive and emotional control over himself when making economic decisions.
Why and how people make certain economic decisions can be linked to their psychology and emotions. While rational people make rational decisions, irrational decisions tend to emanate from individuals who lack self-control and are moved by their emotions.
When presented with various options, under certain conditions, individuals tend to make choices as influenced by their emotions and psychological. The ability to make rational choices is dependent on how well individuals can tame or control their emotions.
While people who are easily moved by emotions tend to make irrational choices, those who have self-control make somewhat logical choices.
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