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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  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. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  5. How do mutual funds split?

    Mutual funds split in the same way that individual stocks split, but less often. Like a stock split, mutual fund splits do ... Read Full Answer >>
  6. 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 >>

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