1.5 behavioral Economics

economics studies how people make choices and is a social science

T R A D I T I O N A L VS B E H A V I O U R A L

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

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

• make rational decisions

• don’t always act rationally

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

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

h o m o e c o n o m i c u s

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

r a t i o n a l c h o i c e t h e o r y

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

i r r a t i o n a l b e h a v i o u r

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

l o s s a v e r s i o n

→people are sensitive to losses than to equivalent gains