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Behavioral Economics

What Is Behavioral Economics?

Behavioral economics is a field of study that applies insights from psychology to decision-making. It illuminates outcomes that might be deemed irrational according to classic economic theory. Why, for example, do we often think we know what we want, only to be disappointed with our purchases and choices?

In the model of rational action assumed by classical economics, a person is expected to weigh the benefits and drawbacks of an action and then choose the best possible option; behavioral economics demonstrates that people rarely behave in this manner. Individuals are often influenced by emotions and innate biases (such as future discounting) to make choices that are not in their best interests in the long run.

What's more, many decisions must be made under conditions of great uncertainty, where not much is known about all the risks and benefits of a choice or where those features are constantly shifting. Behavioral economics aims to understand the effects of uncertainty on decision-making in such realms as consumer purchasing and financial savings.

How Can You Influence People's Behavior?


Many people are inclined to choose an option that brings instant pleasure, rather than the one which will beget long-term satisfaction at the expense of short-term gratification. Using behavioral economics, individuals and institutions can take advantage of this to manipulate people into a specific course of action or purchase.

One way that a person can be influenced is through a "nudge," a combination of positive reinforcement and indirect suggestions encouraging specific behaviors. Not all of these manipulations are harmful, as behavioral economics can be used to get people to make positive behavioral changes, such as eating less or saving more money.

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