What is Behavioral economics?
Behavioral economics studies how psychological, social, and emotional factors cause people to make decisions that deviate from what standard economic models predict. It bridges psychology and economics to explain why people are not the perfectly rational agents that classical theory assumes.
How it works
Rather than maximizing utility with perfect information, people rely on mental shortcuts (heuristics), are influenced by how choices are presented (framing), and weight losses more heavily than equivalent gains (loss aversion). These systematic patterns are predictable, not random.
Applied example
A retirement savings program that automatically enrolls employees and requires them to opt out, rather than opt in, dramatically increases participation rates, because it leverages inertia and default bias rather than assuming people will rationally choose to save.
Why it matters
Behavioral economics provides the scientific foundation for designing policies, products, and communications that work with human psychology rather than against it.
