Behavioral economics is focused on studying psychology related to economic decisions of both institutions and individuals. In this field, there are two critical questions that are trying to figure out and these are:
- Are the assumptions of economists toward profit or utility maximization is a good estimation of behavior?
- Do people really maximize the expected utility?
This study is drawn more on economics and psychology in an effort to discover why people are making irrational decisions and to how and why their behavior doesn’t follow economic model predictions.
Going beyond the Surface of Our Decisions
Decisions as simple as how much to pay for coffee, whether to pursue graduate school, a healthy lifestyle, how much should be allocated for contribution on retirements and the likes are the decisions that many people make throughout their lifetime.
With behavioral economics, its job is to get explanation why such person has made a decision to go for option A rather than option B.
Its Application
Heuristics is one of the many applications for behavioral economics. This is the mental shortcuts or rule of thumb in making quick decisions. But when decisions resulted in error, heuristics may then result to cognitive bias
Yet another field where this is applicable is behavioral finance where it seeks rational explanation why investors are making rash decisions when they are trading in capital markets.