Behavioral Economics

Behavioral economics combines economic theory with findings from psychology about how people actually make decisions, in contrast to the fully rational, consistently self interested decision maker assumed by most earlier economic models. The field is closely associated with the psychologists Daniel Kahneman and Amos Tversky, whose 1979 paper on prospect theory documented systematic and predictable ways that real decision makers depart from strict rational choice, particularly in how they weigh gains against losses and how they judge probability under uncertainty. Behavioral economists have gone on to document a wide range of cognitive biases and heuristics that shape economic choices, from present bias in saving decisions to herd behavior in financial markets, and the field has informed both academic economics and public policy design, including so called nudge approaches that adjust the way choices are presented rather than restricting the choices available. Behavioral economics does not reject the tools of mainstream economics so much as revise its assumptions about the decision maker at the center of the analysis.