Behavioural economics studies how psychological, social and emotional factors influence the economic decisions of individuals and organisations. It's a branch of economics that examines the following:
- People make choices that aren't always rational and
- People deviate from the assumptions of traditional economic theory
Traditional economics assumes people are rational, have perfect knowledge, make decisions based on self-interest, and change their thoughts and beliefs according to new information.
Behavioural economics challenges those hypotheses, deeming them unrealistic. Three main restrictions impact a person's ability to make a well-informed decision:
1. Limited time
2. Complete information isn't readily available
3. Computational weakness: difficulty calculating the probability of something happening
The field seeks to explain why individuals often behave in ways that are seemingly irrational - for example, being overly risk-averse or succumbing to cognitive biases. It has numerous applications, from compliance and public policy to marketing and advertising.