Behavioral Economics Flashcards, test questions and answers

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What is Behavioral Economics?

Behavioral economics is a branch of economics that looks at how psychological, social, and emotional factors can affect economic decision making. It combines elements of psychology, sociology, and economics to better understand why people make the choices they do when it comes to spending, saving, investing and more. Behavioral economic research has helped to explain why people often make decisions that are not in their own best interest or are inconsistent with traditional economic models.Behavioral economists focus on understanding the impact of emotions on our decisions. They have identified several mental biases that have an influence on our behavior when it comes to money: confirmation bias (we tend to search out information that confirms our existing beliefs), loss aversion (we feel losses more than gains), status quo bias (we tend to stay with what we know and avoid change) and anchoring (our initial impressions shape subsequent judgments). Behavioral economists also look at how social norms can affect decision-making. People may be reluctant to go against what everyone else is doing or may be influenced by authority figures when it comes to financial matters. Additionally, behavioral economists analyze the impact of incentives on behavior whether these incentives are tangible rewards or simply recognition for good decisions. By looking at both the traditional economic models as well as psychological factors, behavioral economists are able to get a better picture of how people make decisions regarding money which could lead to better policies and practices in fields such as marketing and finance.