Behavioral economics

Behavioral economics: a field guide

Why does a $50 shirt seem expensive on its own, but reasonable next to a $100 shirt? And why can saving for retirement feel important until it means giving up something you want today? Behavioral economics brings psychology into economics to help explain choices like these. This guide covers the field’s main concepts and theories, from risk and self-control to fairness and nudges, with learning paths and a glossary of 264 terms.

Looking for the short version? Read the definition of behavioral economics.

Start with the decision

What kind of choice are you looking at?

Start with the decision you want to understand. Are you weighing a risk, putting something off, or trying to make sense of a price? The ideas below cover different parts of those choices, and some will be useful for more than one.

Risk and uncertainty

A possible loss can change how you weigh a gamble. When the odds are unclear, the uncertainty itself can make an option less appealing. These concepts help explain how people judge risk, probability, and loss.

Now or later

You plan to save, exercise, or finish a project. Then the immediate cost starts to matter more than the future benefit. Explore present bias, self-control, and ways to make it easier to follow through.

Spending, saving, and prices

A bonus can feel like spending money, while the same amount in your savings account feels off-limits. Mental accounting and related ideas explain how the source, label, and timing of money can change a decision.

Fairness and other people

People care about fairness, whether they can trust someone, and what others are doing. These motives can help explain a choice that looks puzzling if you assume everyone cares only about their own payoff.

How choices are presented

A preselected option, a complicated form, or different wording can change what people choose. Learn how defaults, framing, friction, and other parts of choice architecture can influence decisions.

Attention and mental shortcuts

We rarely examine every piece of information before deciding. An easy-to-recall example or the first number we hear can shape a judgment, even when better information is available.

The main ideas

A map of behavioral economics

If you know behavioral economics mainly through cognitive biases or nudges, you’ve only seen part of it. The field also studies what people value, how they form beliefs, and how they make decisions. Businesses and governments respond to those choices, sometimes helping people and sometimes taking advantage of their mistakes.

Preferences

Preferences are about what people want and how much they value it. A gain can look different from an equally sized loss; a reward can become less appealing when it is further away. People may also care about someone else’s outcome, not just their own.

Beliefs

Beliefs are about what people think is true or likely to happen. We can be too sure of an estimate, expect things to go better than they will, or judge a risk by the examples that come to mind.

Decision processes

How do people choose when they don’t have unlimited time, attention, or information? They use shortcuts, overlook options, and sometimes settle for something good enough rather than finding the best possible choice.

Markets and institutions

Businesses and governments don’t just watch people make decisions. They set prices, design forms, choose defaults, and respond to what people do. That can make a decision easier, or make an expensive mistake more likely.

The first three areas come from Stefano DellaVigna’s review of psychology and economics. The fourth covers a related question in the review: how firms and other institutions respond to people’s choices. Read the review

Understanding a decision

Five questions before you call it a bias

Someone keeps putting off a form. Is that present bias—the tendency to give extra weight to immediate costs and benefits? Possibly. But they might be tired, unsure what a question means, or waiting for a document they don’t have.

A bias gives you one explanation to consider. To find out whether it fits, you need to understand the person, the task, and what actually happened.

Learn how to study the problem

01
What happened?
Start with what the person did, not your explanation for it. Did they abandon the form, postpone it, or try and fail to finish? Those are different problems.
02
What else could explain it?
Check whether confusion, missing information, fatigue, habit, skill, access, incentives, or social pressure could explain the behavior. The right response depends on the cause.
03
What changed?
Say exactly what you changed—the reminder, the wording, the default, or the amount of effort required—and what you compared it with. “We used behavioral science” doesn’t tell anyone what you did.
04
What was measured?
Signing up is not the same as taking part, and taking part is not the same as benefiting. Check whether the study measured the outcome you actually care about.
05
Was the result useful?
How much did it help, and for how long? Consider who benefited, who didn’t, what it cost, and whether a different approach might have worked better.

Learning paths

Learn the ideas that interest you

Pick a topic you want to understand and read the entries in the order shown. The entries build on one another within each path.

Path 1

Start with the economic model

What does the standard economic model assume about people? Start there, then explore bounded rationality: the limits that time, information, and thinking place on our decisions.

Path 2

Understand value, risk, and loss

How much is something worth to us, and why can losing it feel different from gaining it? Learn how utility, reference points, and prospect theory explain choices involving risk.

Path 3

Understand time and self-control

Start with choices between now and later. Then explore why plans change when a temptation is right in front of us, and how a commitment device can limit our future options.

Path 4

Find out whether an intervention helped

A nudge is meant to influence a choice. These entries help you ask whether it did, how much it helped, and whether the published research gives you a reliable picture.

Nudges and evidence

A nudge still has to solve the right problem

A reminder might help someone who forgot an appointment. It won’t free up their afternoon if they can’t leave work. Before choosing a nudge, ask what is stopping the person from doing the thing in the first place.

Then ask whether the nudge actually helped. Stefano DellaVigna and Elizabeth Linos compared 126 randomized trials from two US nudge units with a separate sample of published academic studies. Average effects were smaller in the nudge-unit sample. They weren’t retesting the same interventions in both samples. But the gap is a reason not to assume that a striking result in a paper is what you’ll get when you try an intervention yourself.

Even a real effect may not answer your practical question. A default might increase enrollment in a program without increasing participation later on. Look at the size of the effect, whether it lasted, what it cost, and whether it improved something that matters to the people involved.

Read the evidence on nudges Read DellaVigna and Linos’s study Browse the research methods and evidence glossary

For earlier arguments against broad promises about nudging, read The Death of Behavioral Economics and Bad News for Nudges. The evidence review above brings the research together in more detail.

Browse by subject

Browse behavioral economics by subject

Looking for a particular subject? These collections group related terms, from mental accounting and social preferences to choice architecture. Some concepts belong in more than one collection.