Behavioral Economics

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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