Behavioral economics

economic-dictionary

Behavioral economics or behavioral economics is the study of how psychological, social or cognitive factors affect the economic decisions of individuals.

Behavioral economics is primarily interested in explaining why individuals often behave differently from a rational agent, moving away from one of the fundamental assumptions of classical economics. The same is the case with behavioral finance that departs from the assumptions of traditional finance.

The models used to analyze behavior usually integrate ideas from psychology, neuroscience, and microeconomics.

Some examples of behavioral economics

Behavioral or behavioral economics has observed various behaviors of ordinary people that violate the assumption of rationality when making consumer decisions. Here are some examples:

  1. Avalanche of information: Consumers have to compare many options and features, leading to confusion, choosing randomly, or even making no decisions at all.
  2. Heuristics: Consumers often take shortcuts in their decisions. Thus, for example, instead of analyzing all the information, they limit themselves to buying the same as their friends or family.
  3. Legacy: Consumers tend to be reluctant to switch providers or brands for fear of making a mistake.
  4. Inertia: Consumers generally do not switch providers when they have to make an effort (such as disabling an automatic renewal clause).
  5. Myopia: Consumers tend to have a short-term vision favoring current enjoyment rather than waiting to enjoy the future. So, for example, when long-term investment or retirement savings decisions have to be made, consumers don't place enough value on future payments.
  6. Setting: Consumers are influenced by the way or the setting in which the information is presented. Sometimes the same data displayed in different ways leads to different decisions.
  7. Risk aversion: The preference to avoid a loss is greater than the preference to gain something.

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