Title: Behavioral Economics | Psychology Today
Headings: Behavioral Economics
Behavioral Economics
Contents
Understanding Behavioral Economics
What is the difference between traditional economics and behavioral economics?
Why is behavioral economics important?
Do economic incentives to change behavior work?
Irrationality and Behavioral Economics
What are some examples of bias in behavioral economics?
What is the main drawback in using heuristics to solve problems?
What are some examples of heuristics that lead to irrational choices?
Does having too many options lead to poor decision-making?
How Can You Influence People's Behavior?
What is nudge theory?
What is an example of a nudge?
What are some nudging techniques?
Is nudging ethical?

Content: American economist and cognitive psychologist Herbert A. Simon came up with the theory of bounded rationality, which explains how people’s rationality is limited by the timeframe, by their cognitive resources, and by the difficulty level of the decision. Simon said that decision-makers frequently act as satisficers, seeking a satisfactory solution instead of an optimal one. Nobel Prize-winning cognitive psychologist Daniel Kahneman (who also came up with fast and slow thinking systems) and Amos Tversky developed prospect theory, which shows how irrational decision-making is informed by clinical psychology. Prospect theory has two stages: an editing stage, where heuristics or mental shortcuts are applied in risky situations, and an evaluation stage, where psychological principles like loss aversion and reference dependence are used to analyze risky alternatives. These theories and a better understanding of irrational decision-making inspired further developments in behavioral economics. American economist and Nobel laureate Richard Thaler outlined mental accounting as the process by which people code, categorize, and weigh economic outcomes. Thaler also developed nudge theory to explore how people’s choices can be influenced (aka “nudged”) by individuals and organizations taking advantage of framing and heuristics. What is the difference between traditional economics and behavioral economics? Created with Sketch.