Behavioral Economics

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DEFINITION of 'Behavioral Economics'

The study of psychology as it relates to the economic decision making processes of individuals and institutions. The two most important questions in this field are:


1. Are economists' assumptions of utility or profit maximization good approximations of real people's behavior?


2. Do individuals maximize subjective expected utility?

BREAKING DOWN 'Behavioral Economics'

Behavioral economics explores why people sometimes make irrational decisions, and why and how their behavior does not follow the predictions of economic models. Notable individuals in the study of behavioral economics are Nobel laureates Gary Becker (motives, consumer mistakes; 1992), Herbert Simon (bounded rationality; 1978), Daniel Kahneman (illusion of validity, anchoring bias; 2002) and George Akerlof (procrastination; 2001).

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RELATED FAQS
  1. How does behavioral economics treat risk aversion?

    The findings of behavioral economists regarding risk aversion can best be summarized by the phrase, "losses loom larger than ... Read Full Answer >>
  2. What is a value proposition canvas and how is it created?

    A value proposition canvas is a graphic tool created to help a business map out the key elements about its products or services ... Read Full Answer >>
  3. What are the four types of economic utility?

    The four types of economic utility are form, time, place and possession. "Utility" in this context refers to the value, or ... Read Full Answer >>
  4. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  5. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  6. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>

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