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What is Behavioral Economics?

Behavioral economics blends psychology with economics to explain how people really make decisions, which often deviates from the idealized, "rational" decision-maker of traditional economics.

How do you make decisions?

  • Traditional Economic Model

    • Step 1: You have all the information.

    • Step 2: You weigh the pros and cons rationally.

    • Step 3: You choose the option that maximizes self-interest.

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  • Behavioral Economic Model

    • Step 1: You have limited information.

    • Step 2: You rely on mental shortcuts like heuristics.

    • Step 3: Your decision is influenced by cognitive biases and social factors.

Key Concepts in Behavioral Economics

  • Heuristics

    • 🔮 Availability Heuristic

    • 🎲 Representativeness Heuristic

  • Biases

    • 📉 Loss Aversion

    • 🏆 Overconfidence Bias

  • Nudges

    • 📝 Defaults (e.g., opt-in vs. opt-out systems)

    • 🖼️ Framing Effects

  • Social Influence

    • 👥 Peer Pressure

    • 👗 Conformity (following social norms)

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