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behavioral economics

Contributor(s): Matthew Haughn

Behavioral economics is the study of economic decision-making by individuals and institutions.

Behavioral economics studies consumer choices, market events and human psychology to help understand their decisions and to try to make more accurate economic models. Behavioral economics attempts to unite the fields of behavioral psychology and economics.

Prior to behavioral economics, economic predictions were based on an assumed capacity in the average consumer for making rational choices. The model of rational choice assumed the decisions of consumers were rational, planned and made for their own wellbeing. This model hinged on the created concept of homo economicus : humans motivated by self-interest, choosing amongst options in situations of scarcity.

The earliest revelations of behavioral economics revealed entirely different trends in consumer behavior, showing how flawed the assumptions of rational choice models were. Consumers are often uncertain of what they want, for example, and make choices that are not to their long-term benefit. Frequently, consumers don’t know themselves what they will want in the future.

Behavioral economics has revealed that the unpredictability of consumers will almost certainly maintain an unpredictable market. The field of study is criticized for not yielding more predictive models and for using methods of survey and experimentation that are not favored in traditional economics.The fundamental assumption of selfishness in behavioral economics has been contested by research which inspired the newer concept of homo reciprocans : humans as cooperative and collaborative actors who work towards improving their shared environment.

This was last updated in January 2018

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