Behavioral Economics

Economics is concerned with production, consumption, and wealth, all of which involve human behavior. However, not all economic ideologies base their predictions on the same ideologies. Two popular and opposing branches are traditional economics and behavioral economics. Traditional economics makes calculations on human behavior based on the idea that humans are rational beings that are reasonably successful at deciding what they value and acting to maximize it. Behavioral economics, on the other hand, combines psychology with economics in order to try and better understand how humans actually act instead of how they should act. This means taking into account factors like emotions, beliefs, cultural influences and cognitive biases, all of which cause humans to deviate from straightforward rationality.²

Imagine that you are deciding what kind of laptop to purchase. According to traditional economics, the only thing that would be considered in this purchasing decision would be utility. Which laptop is the best in order to maximize utility? What laptop is the best value for its money?

However, behavioral economics would allow room for other influences, such as emotions, or bounded rationality. What laptop is considered cool? How much time did you have to make the decision?

The second set of questions represents the kind of factors that behavioral economics takes into account, which might not be rational influences, but impact decision-making all the same. Once behavioral economics has been able to understand the different kinds of influences that really impact human behavior, it also can demonstrate how human behavior can be shaped through the use of heuristics and biases. Instead of expecting humans to behave rationally, we can understand how biases influence their decisions. Policy makers, governments and businesses can use behavioral economics to their advantage to try and push people towards making the best decisions possible.