What is Behavioral Economics?

Behavioral economics studies the effects that emotional, social and cognitive factors cause in the economy. They change variables in different scenes in order to determine generally how these factors affect the economy.

” Behavioral economics is primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology, neuroscience, and microeconomic theory; in so doing, these behavioral models cover a range of concepts, methods, and fields.

The study of behavioral economics includes how market decisions are made and the mechanisms that drive public choice. 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.

In 2017, economist Richard Thaler was awarded the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics and his pioneering work in establishing that people are predictably irrational in ways that defy economic theory.

Three prevalent themes in behavioral finances:

  • Heuristics: Humans make 95% of their decisions using mental shortcuts or rules of thumb.
  • Framing: The collection of anecdotes and stereotypes that make up the mental emotional filters individuals rely on to understand and respond to events.
  • Market inefficiencies: These include mispricings and non-rational decision making.” Source: https://en.wikipedia.org/wiki/Behavioral_economics.