Behavioral Economics

AAA

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?

INVESTOPEDIA EXPLAINS '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).

RELATED TERMS
  1. Rational Choice Theory

    An economic principle that assumes that individuals always make ...
  2. Organizational Economics

    A branch of applied economics that studies the transactions that ...
  3. Rational Behavior

    A decision-making process that is based on making choices that ...
  4. Gambler's Fallacy

    When an individual erroneously believes that the onset of a certain ...
  5. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  6. Market Psychology

    The overall sentiment or feeling that the market is experiencing ...
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Active Trading Fundamentals

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  3. Mutual Funds & ETFs

    The Knowledge-Experience Continuum: Where Do You Fall?

    Theory and practice are worlds apart, but problems arise when people treat them as one and the same.
  4. Trading Strategies

    5 Ways To Adapt To Tough Markets

    Tough markets undermine profitability and lower self-confidence. Fight back with five simple but powerful rules of engagement.
  5. Active Trading Fundamentals

    What is the difference between cash flow and fund flow?

    See how cash flow and fund flow differ from each other, and why fund flow can be used very differently by accountants and investors.
  6. Active Trading Fundamentals

    How do central bank decisions affect volatility?

    Using an aggregate, macroeconomic perspective, take a look at how some of the ways central bank decisions can impact market volatility.
  7. Trading Strategies

    Adapt The 50-Day EMA To Enhance Your Trading

    The 50-day EMA has numerous applications in price prediction, position choice & strategy building
  8. Chart Advisor

    Triangle Breakouts Could Lead To Decisive Moves

    Triangle pattern breakouts in these stocks could lead to more trending moves in the near future.
  9. Trading Strategies

    Top Strategies Remote Traders Should Follow

    Most traders cannot watch every tick because they have lives away from the markets. These folks can take simple steps to raise the odds in their favor.
  10. Technical Indicators

    What is the Positive Volume Index (PVI) formula and how is it calculated?

    Understand how traders and analysts use the Positive Volume Index indicator, the theory behind it and the formula used to calculate it.

You May Also Like

Hot Definitions
  1. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  3. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  6. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
Trading Center