Behavioral Economics

Published Jul 31, 2023

Definition of Behavioral Economics

Behavioral economics is a subfield of economics that studies how social, cognitive, and emotional factors affect economic decision-making by individuals and institutions. In other words, it examines how human behavior differs from traditional economic models and how these differences can impact economic outcomes.

Example

One example of a real-world application of behavioral economics is found in the realm of retirement savings. Traditional economic models assume that individuals will save and invest for their future retirement according to their rational self-interest. However, in practice, many people do not save enough or at all for retirement, even when they have the financial means to do so.

Behavioral economists study why this is the case and have found that factors such as present bias, loss aversion, and lack of financial literacy can make it hard for people to prioritize saving for retirement. To address these issues, many behavioral interventions have been developed, such as automatic enrollment in retirement savings plans, simplifying investment choices, and goal-setting programs.

These interventions have been shown to increase retirement savings participation and contributions, and they offer insights into how human behavior can be nudged or influenced to create better economic outcomes.

Why Behavioral Economics Matters

Behavioral economics has increasingly gained attention and importance in recent years, as it provides a more nuanced understanding of how individuals and institutions make economic decisions. By understanding the cognitive and emotional biases that impact economic behavior, policymakers and businesses can design effective interventions to bring about positive economic outcomes.

Furthermore, the study of behavioral economics has led to greater recognition of the importance of individual psychology and decision-making, which can ultimately lead to a better appreciation of the social welfare implications of economic policies.