1.5 behavioral Economics

what do economics study?

how people make choices and is a social science

what factors apply to traditional economics?

• agents are maximisers (meaning economic agents want to get the greatest possible benefit from the resources they have available)

• make rational decisions

• they explore costs + benefits of a decision + the different options before making a decision

what factors apply to behavioural economics?

• decisions of economic agents are influenced by social, emotional, and psychological factors

• don’t always act rationally

• there’s imperfect information + difficult to understand all info presented to them

define irrational behaviour

when people make systematic + persistent deviations from rational choice - can come from herd mentality or emotional decision making

define loss aversion

→people are sensitive to losses than to equivalent gains

define homo economicus

→the idea that people are rational and self-interested + make decisions based on maximising their own utility and satisfaction

state the rational choice theory

the assumption that economic agents are maximisers using the information available to them in order to maximise their objectives