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. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  5. Gambler's Fallacy

    When an individual erroneously believes that the onset of a certain ...
  6. Market Psychology

    The overall sentiment or feeling that the market is experiencing ...
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 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 >>
  5. 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 >>
  6. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>
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

    Uncovering Evidence Of Sector Rotation

    Stalk ETF performance lists over several weeks to uncover hidden institutional buying and selling strategies.
  5. Economics

    What Does Inferior Good Mean?

    The term “inferior good” does not describe a lack of quality, but rather, is an economic term used when discussing elasticity of demand for a good.
  6. Economics

    What Is a Giffen Good?

    A Giffen good is a product whose demand increases as its price increases, and falls when its price falls.
  7. Economics

    What Does Going Concern Mean?

    Going concern is a concept used in business and accounting to describe the fiscal health of a company.
  8. Investing Basics

    Explaining Counterparty Risk

    Counterparty risk is the risk that the other party in an agreement will default, or fail to live up to its contractual obligation.
  9. Economics

    Explaining the Supply Chain

    A supply chain is the cumulative network involved in moving raw materials, components and finished products from original suppliers to end users.
  10. Fundamental Analysis

    How is the Demand Schedule Calculated?

    A demand schedule is a table that lists the quantity demanded of a good at different price points.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!